Bulls have firmly taken over Dalal Street, with the Sensex hitting a fresh record high today. But a thought may have crossed many investors' mind: why is my portfolio still in red?
Let's break that down. A large part of what is happening in the benchmark indices is led by few largecaps, which have a dominant position in terms of weightage. On the other hand, small & midcaps stocks are still under pressure, and are down in double digits so far in the year 2018.
To put things into perspective, the S&P BSE Sensex has risen nearly 8 percent in 2018. This compares to a 14 percent fall in the S&P BSE Midcap index and a 17 percent drop in the S&P BSE Smallcap index during the same period.
“Currently, quality is getting too high a premium due to recent episodes like Vakrangee, Manpasand Beverages etc. It is for this reason that some largecap companies are getting costlier and driving frontline indices higher. This large divergence will not remain and markets will soon start converging as memories of market participants fade,” Jimeet Modi, founder & chief executive officer at Samco Securities & StockNote told Moneycontrol.
The small and midcap space, which dominated the market in the previous calendar year came under intense selling pressure in 2018. This was thanks to the reclassification of MF schemes, SEBI's ASM initiative or additional surveillance measures, and the resignation of auditors.
The performance across mid and small cap stocks for 2-3 years prior to the correction that started in January 2018 was stunning, primarily on account of improvement in earnings and expansion of P/E multiples. But the momentum soon fizzled out after the Budget.
Given the fact that mid & smallcap were top performers during the previous two-three years, the percentage of stocks (mid & smallcaps) in investors’ portfolio also increased over time, which is one of the primary factors why portfolios are suffering.
“The Sensex touched record highs but investors’ portfolios are still in red for the year 2018 as BSE Mid Cap stocks have faced a correction in the last few months though largecaps stocks are almost recovered from their lower levels. Investors having midcap stocks in their portfolio are still suffering,” Astha Jain of Hem Securities Ltd told Moneycontrol.
“We expect the upward rally in the market will continue for some time but factors like increase in crude oil prices, poor monsoon, rising global interest rates and further depreciation in rupee from current levels can prove to be likely headwinds for Indian stock markets,” she said.
In the year 2018, the Indian market has proved to be a mixed bag for Indian investors. While benchmark indices are trading at fresh peak, broader market is trading near a yearly trough. The divergent trend has left many investors and traders clueless about taking positions in this bipolar environment.
“Mid and smallcaps had risen significantly over the past 2 years without even a 15-20% correction, which is the usual trend in equities every year barring CY2017. This had resulted in mid/small cap valuations rising to an almost 28% premium versus largecaps,” Prabhudas Lilladher said in a note.
“Some course correction was due, which is happening currently. This makes markets healthy from a long-term perspective. The funnel of performing stocks has got narrower over the past 2-3 months resulting in severe erosion in most portfolios,” it said.
Historically, market capitalization has an inverse relationship with both risk and return. Companies with larger market caps tend to offer lower returns, on average, than mid/small-cap stocks.
The note from Prabhudas points out that largecaps tend to be less volatile during rough markets as investors fly to quality and become more risk-averse.
This is precisely the opportunity for buying into mid/small-cap space as a result of attractive valuations vs their long-term historical valuation multiples.
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