There is a reason why people chase mid- and small-caps. Had investors remained with large-cap, they would have been better off with far lower risks. Now that the mid-caps have been hammered, returns are 16% lower than in large-caps. This suggests that investors embraced far too high risks in mid- and small-caps for not much higher returns ( see Chart 3). But back in 20, they were 50% and over 28% higher, respectively. Returns from mid-caps were about 20% in December 2017. Even in the mid-cap boom phase, excess returns of mid-caps over large-caps were hardly much higher. Sure, there are parallels such as the 1992 crash and the 2000 unravelling, and, still recently, the 2008 crash and the 2013 lows. The liquidity squeeze meant that investors quickly turned risk-averse, and looked askance at mid- and small-caps. Most small businesses are now hard pressed for cash. As small non-banking financial companies could not raise money, onward lending has been severely hit. Of course, to an extent, the crisis in mid- and small-caps aggravated after the Infrastructure Leasing and Financial Services liquidity crisis. Stocks of companies such as Vakrangee Ltd and Manpasand Beverages Ltd are a case in point. Shorn of inflows, and due to the heavy selling, this was the start of the southbound journey ( see Chart 1 and 2).Īdd to that governance issues which cropped up in most mid- and small-cap counters, further dragging them down. Mutual funds then began to weed out mid-cap stocks and shifted to large-cap stocks in a huge way. Markets regulator Securities and Exchange Board of India recently brought in norms that curbed mutual funds from investing in stocks outside their mandates. Blame it on the new reclassification norms for mutual funds that came in January 2018 or on the surveillance measures of stock exchanges or on the recent liquidity crisis, this mid-cap crisis has only intensified.

Many stocks in the small- and mid-cap universe may not see a revival anytime soon because investor interest is at its low, and still plummeting.īesides, it’s a sentiment that will not quickly change. That is what is happening in the market right now. The downside of this is that prices can fall further when one is waiting to sell these shares. This means that when you want to buy or sell shares, it will take longer to find a buyer or seller. In a liquidity-dried market, smaller companies see fewer investors trading shares. To top it all, the government is expected to divest ₹1 trillion this year, which would again squeeze money available. Besides, the minimum public stake of 35% would tighten liquidity in the market. The surcharge on foreign portfolio investors (FPIs) has spooked markets. Though, this could see an initial adverse reaction, over time, as India’s weights in global MSCI indices improve, it could lead to inflows of over $25 billion.īut in the immediate term, however, hopes of a revival in mid-caps seem to have been dashed by the recent budget proposals. To be sure, the minimum public shareholding norms for public sector undertakings (PSUs) proposed in the budget, if implemented, will not be entirely bad for the markets. Noted market expert Shankar Sharma recently tweeted: “A handful of Nifty stocks is masking the ugly truth that the Indian market, now and over the last 18 months, has been far, far worse than the 2008 meltdown in terms of price damage.' Going by the sentiment in the market, it seems small-caps are completely busted for now. Chances are, if you owned 20 stocks, 17 of them would have suffered losses. More than 1,976 stocks traded on BSE have dropped since January-that’s 86% of all traded stocks.

all stocks listed on the BSE, and the picture is even grimmer. Of the BSE 500 stocks, 71% have seen negative returns since January 2018 when the slide started. One might be tempted to think that all is well with the market, but that isn’t the case.Ĭonsider this. The bellwether gained 12% since January 2018, and till recently was soaring to new highs, although, within the large-cap universe, only a handful of stocks are driving the index higher. On the other side of the market cap divide, the large-cap based BSE Sensex has been masking the pain. The BSE MidCap and the BSE SmallCap indices lost 21% and 30.7%, respectively, since January 2018. So much is the pain in the mid-cap sector that since January 2018 investors have lost more than ₹28 trillion in all the corrected stocks. Now, as most of these stocks have no liquidity, one star fund manager of a portfolio management service offered, instead, to return shares to his clients because he can’t sell them.

Some portfolio management services, too, fell prey to the mid- and small-cap lure. Small and retail investors aren’t just the only casualties.

Micro cap stocks 2018