WHY THIS CORRECTION IN MIDCAPS AND SMALL CAPS
WHEN WILL IT END
There are periodical corrections in stock market. This is a fact of life in stock market.Some times the corrections are long and deep. Some times they are short and shallow.
2008-2009 correction :
In 2008-2009, there was a long and deep correction in the whole stock market. That correction lasted for more than an year. Then, the bounce back started, first slowly, then in a big way, then, as an avalanche. Those who invested during the correction period reaped great fortunes and became rich, never to turn back in life.
Some of the famous, successful investors of today were made by the correction period of 2008-2009. They invested well in the correction period and stayed put throughout until the correction was over.
CORRECTIONS ARE OPPORTUNITIES :
So corrections afford such an opportunity to shrewd long term investors.
Corrections, like any other difficult periods of life, are - exasperating, tiring, angering, bewildering, frustrating. Lacks and crores of PAPER PROFITS vanish into thin air. They go back to where they came from.
Paper profits came from nowhere and they went back to nowhere. This money game in the stock market is always like that.
But then, why does such huge corrections come at all?
It is our collective wisdom or collective foolishness, call it whatever you like, that results in corrections, subsequent uptrends, subsequent corrections and subsequent uptrends and so on.
WHY ARE CORRECTIONS A RESULT OF OUR COLLECTIVE WISDOM / COLLECTIVE FOOLISHNESS?
So,why did the prices of Midcaps and small caps fall at all, in the first instance? Some may have produced lack lustre results, some may have produced bad results but many have produced good results.
RUMOURS, SUSPICIONS & CONTROVERSIES:
Some were mired in unnecessary, avoidable controversies and rumours which, the market and the companies must all have swiftly enquired and put out the truth for information of all. That did not happen swiftly and efficiently.
Rumour floaters were doing it too often. But, neither the companies not the regulators were acting swiftly to bring out the truth and cut out the rumours authoritatively. This was one reason in this season's correction phase.
HERD INSTINCT :
We act like a Herd of Goats. Indian Investors do act with Herd Mindset. For that matter, Investors in most markets act with Herd instinct. If the first few go in one direction, all others follow. Especially, when rumours and controversies plagues 2 or 3 companies,first they are deserted in Hordes like Herds.Instead of seeking the company and the Regulator's explanation on the rumours and controversies, even big investors set out to sell their huge holdings and get out of those companies, In one case, some FPIs sold out and went out. So, prices fall from High levels to low levels very quickly with each day hitting the Lower circuit.
FAILURE OF REGULATORS / COMPANIES :
When strong rumours / suspicions are raised against any company, it is the bounden duty of the company and the regulators to scotch those rumours quickly and conclusively. But, this did not happen in respect of any rumours which came up in recent past.
So, market prices go on collapsing. Till today, many market rumours remain for months.It is the failure of market, market regulators and companies which result in unnecessary corrections. If regulators ask companies to submit data specific to the complaint, probably many rumours will die down. It is not happening.
TOO MANY BEARS :
Some how, there seem to be too many bears in Indian Market. In F&O also, too many people resort to shorting in anticipation of prices falling. When prices are falling in cash market, people sell at higher prices and wait for lower prices to repurchase again. This also triggers avoidable sales aroused by the rumours. The expectation of steep fall in prices is one cause of hordes of sales in any scrip.
FPIs/FIIs/DIIs and PFMs actions.
Ultimately, why did the Midcaps and small caps suffer so steep a fell? Why did money move from a Mid cap or small cap which has scored over 100 % profit jump YoY to a Large cap like Infosys which has registered hardly 2% rise in net profit YoY. It looks ridiculous to jump when the Mid cap or small cap has achieved over 100% profit jump and decent sales jump and yet falls 50% in price due to the selling of the scrip in hordes - just for purchasing a Large cap scrip which has registered a single digit jump like infosys or a 23% jump like TCS without any guarantee that even this performance will be repeated.
In my opinion and after deep examination, I find, large cap companies don't have any great plans to expand their operations in a big way. It is of course difficult. Reliance is attempting big expansions. But, all IT Majors are remaining as contractors or Project Managers. No great plans for expansions. In fact they are recruiting lesser and lesser persons now and attrition rates are high.
So, why are all these fund managers shifting funds from Small and Mid caps to large caps. Stability of growth, they say. Did they grow impressively, say, in last 2 years? No. Do they have great growth plans for a 25% growth (without Forex helping) in sales and profits? No. Only Reliance is attempting such big transformations. But, it takes about 10 years to bring in some thing like a JIO. But, Reliance has done it.
Once PM Modi had suggested that IT Majors should attempt things like Indian Google, Indian YouTube, Indian windows and world conquering products like that. At least India conquering products. Do any of us find any such ideas from our IT Majors? Auto, FMCG etc are all still India bound and not attempting to conquer world markets. Pharma is struggling for quite some time and has no ideas to come out.
So, what prompts our fund managers to put money in large caps which cannot hope to outpace Midcaps and small caps in growth trajectories?
LIQUIDITY :
One consideration is 100 cr or even 500 cr you can easily invest in large caps. But, it is difficult and in some cases, impossible to invest such large sums in small caps or Mid caps. Liquidity is a major consideration for investment by large fund managers.
HUGE PRICE APPRECIATION IN 2017
It is a fact that in the euphoria of 2017, many mid caps and small caps have hit very high PE Ratios unjustified by their valuations. So, some correction was needed and expected - to correct the huge PE Ratios. However, when the correction ensued, it has started hitting the LOWER limits of PE rations now.
RATIONALE FOR HIGHER VALUATIONS NOW
Many Mid caps and small caps are in the midst of huge expansion schemes which are likely to push up their production capacities, sales and profits to double and treble of their present values. It may take between 6m to 1 1/2 years for many companies. So, in my opinion, THEY DESERVE hIGHER pe MULTIPLES NOW.
RESULTS SEASON
The results season is throwing up some very good, future, potential multibaggers. Investors must stop them and lap them up at current prices. They are sure to grow beyond their past highs when the BUYING SEASON starts at around the end of the end of the RESULTS SEASON.
BE A CONTRARIAN
The contrarian philosophy is fairly widely known but rarely practised. If all others are selling, evaluate those scrips choose the best o them and put your money into them. When others are afraid, your must dare. When others are all in buying madness, you keep off.
HOW LONG WILL THE CORRECTION LAST ?
This nobody can predict accurately. But, correction itself is itself the madness of the Investor community. How long will this madness last? See. All large scrips have performed moderately, not very greatly. The only long term promise is RALIANCE. There are no multibaggers among large caps. Not to my knowldege. It is difficult. But, there are many, many potential, future, multibaggers among Mid caps and small caps.
Look for their operational performance. Look for their financial performance. Yes. Look at ratios like PE,PB etc. If PE is above 30 leave it straight away. If PE is closer to 20 on either side, and the company has huge expansion plans, consider them. I must warn you - keep a 2 year time horizon.
If you are a little careful in investing for long term,you will be sure gainer in 2 years. No negativities can sustain for 2 years. Market has to move up, All caps will move up.
I wish you good Luck
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