Midcaps and Small Caps took a beating in the year 2017 and again currently after some years . Many were upset about the fall in the markets but most of them were not aware that the music had to stop somewhere . It’s not pessimism but cautious the earnings that propels the stocks engine has started to decelerate which was evident from the earnings in 2017 and a set of events that triggered the fall .
Midcaps & Small Caps were not only falling for their fundamentals but also for a variety of reasons .
1. Midcaps and Small Caps index were trading at a premium to Large Caps and also historically in 2017 .
2. Many names that were darling of the masses before that failed to perform why ? It’s a reason of High Base effect in their stock prices which were far ahead of the fundamentals .
3. Defaults by IL & FS , Which in turn led to writing off many investments made by mutual funds started the trigger . Even at this juncture most of them did not realise. ” There’s always more than 1 cockroach in the kitchen ” .
4. Housing sector slowdown , Default in borrowings and the credit rating agencies giving wrong ratings or were not aware of the ratings given .
5. Interest rates by RBI were cut down citing a slowdown in inflation and growth . Credit growth of the banks slowed down along with the NPA’s rising .
6. Global slowdown in growth and anticipation of lower interest rates by US led to investors chasing higher yields . Indian debt were giving them a good yield but currently that seems to be changing as yields are approaching the 6.4 % mark .
7. Investors who emerged into the market after 2012 who have not seen the 2008-09 crash had it all to their advantage . They though the trees will grow to the sky .
8. Some companies in the micro caps and Small Caps gave returns of 10 x in a short period but the question is Were they following the fundamentals ? Strictly no . Then what was it ? Anticipation in the growth of stock price led to the euphoria .
9. The macros if they are not important for long term investing than should support the long term investors helping them to buy more at such times .
10. When the wave of earnings is not there we will know who is going naked along with the stocks !
Current situation irrespective of the macros and other informations . Selectively buying stocks in Midcaps and Small Caps will be a big game changer in the coming years . But strictly use the volatality as a wave and load on.