Bloodbath in markets: Why Manpasand Beverages, PC Jeweller, Avanti Feeds tanked in last one week
UBS Securities is underweight on smallcap and midcap stocks due to fading support at the interest rate and retail flow fronts.
After a dream run in 2017, the midcap and smallcap stocks are going through a blood bath with the BSE Smallcap and BSE Midcap indices losing 17 per cent and 14 per cent, respectively from their respective lifetime highs touched in January this year. Among individual stocks, Manpasand Beverages, CG Power, PC Jeweller, Avanti Feeds, Radico Khaitan, McLeod Russell and HDIL tanked up to a massive 35 per cent in the last one week.
The BSE mid-cap index and BSE small-cap index are down 12.84 per cent and 15.66 per cent respectively so far in 2018, while the Sensex is up 2.49 per cent during the same period.
Here are three reasons behind the steep fall in mid and smallcap counters:
1. Additional Surveillance Measures: The major reason behind the recent sell-off is Additional Surveillance Measures (ASM) imposed by market regulator Securities and Exchange Board of India (Sebi). Sebi has identified about 30 stocks in ASM list to look into their operations closely. This additional mechanism kicked off on June 1, with ASM stocks facing the heat.
Reacting to this, Manpasand Beverages (down 34 per cent), CG Power (down 28 per cent), Avanti Feeds (down 27 per cent), Caplin Point Lab (down 26 per cent), Aban Offshore (down 22 per cent) and PC Jeweller (down 20 per cent) tanked sharply.
2. Re-classification of mutual fund schemes: Another reason behind steep selloff is Sebi's mandate to reclassify the mutual fund schemes as per market regulator's circular. With fund managers churning their mutual fund portfolios to realign with fresh directives, many mid and smallcap stocks are facing selling pressure.
3. High valuations: The mid and smallcap stocks were trading at exorbitant valuations, running ahead of time for the last few quarters. Analysts believe this is the much-needed correction that we are seeing now. "Midcaps (down 6.8 per cent in May) underperformed the Nifty in May and lagged Nifty on a trailing 12 month basis (8 per cent return v/s Nifty’s 12 per cent)," said Motilal Oswal Securities in a recent report.
|Caplin Point Lab||-26%|
"Due to this sharp underperformance in May 2018, the premium of midcaps v/s large caps narrowed from 23 per cent to 19 per cent," added the brokerage.
Meanwhile, UBS Securities is underweight on smallcap and midcap stocks due to fading support at the interest rate and retail flow fronts.
“The economic growth cycle is less strong now than in historical tightening periods, and this is reflected in earnings cuts. The rise in interest rates is not counter-cyclical,” UBS Securities said in a note on Monday.
“SMIDS (small and mid caps) have started underperforming with rising interest rates recently. We expect this to remain an overhang; our UBS economist forecasts a 50bp (basis points) repo rate hike in FY19,” the report added.
“The best of local retail flows supporting SMID outperformance may be behind us, at least cyclically. Local flows follow returns, not the other way around,” the report said, adding UBS is underweight small- and mid-cap stocks as an asset class in its portfolio positioning recommendation.