INSUBCONTINENT EXCLUSIVE:
Imagine a town that was hurriedly developed without the necessary planning and foundations
Soon, a mini quake hits the area, sending several of these newly-built structures crashing
The buildings built with necessary foundations, however, stay resilient
The current state of the midand small-cap segments bears resemblance to such a rapidlybuilt town ravaged by a quake
In the last few months, shares of the weaker companies in the mid- and small-cap space have crumbled under the weight of the bear onslaught,
while the stronger names have stood steady.
As many investors go about assessing their battered portfolios, there is a sense of shock and
The helplessness comes from their inability to sell and go; many smaller shares are down 40-70 per cent from their highs in February and
In the ensuing blame game, the capital market regulator, Sebi, also has been accused by investor groups of playing a role in the
accentuating the sell-off because of its harsh surveillance measures.
It may be unfair to blame one party for a stock market crash because
That said, some factors always play a bigger part
One such factor that is said to have played a dominant role in the tumble in mid- and small-cap shares is the aggressive investments linked
to portfolio management services or PMS by rich individuals
away a portion of the profits generated, investors put only a portion of their money here and separately build a portfolio mirroring the
For instance, if an investor has Rs 6 crore to invest, she would put only 1 crore in an equity PMS
With Rs 5 crore, she would build another portfolio with the same set of stocks in another account to avoid higher fees and
profit-sharing.
Assets under management in the discretionary segment of PMS providers rose to Rs 11,72,543 crore as on May 30 compared to Rs
8,30,243 crore in the same month of 2016
Assuming that investors doubled their portfolios mirroring the PMS portfolios in their individual accounts, the money in these stocks would
be around Rs 22,00,000 crore
So, when a person redeems her portfolio from the PMS scheme, she would simultaneously sell the same set of stocks in her individual account
Like in the above example, if the investor is redeeming his entire investments worth Rs 1 crore in the equity PMS, she ends up selling the
same stocks worth Rs 5 crore too
Such selloffs have had a cascading effect on smaller stocks in the last couple of months
Smaller shares with limited volumes tend to get caught in a downward spiral in the event of relentless sell orders for a few days.
During
such times, strict surveillance measures by the regulator and exchanges are the last thing that the market needs
The logic for these steps was spot on, but the timing was way off the mark
instead of March, it would have reduced the frenzy in many of these shares then and reduced the pain of these declines
By March, the selloff had already begun.
After the sharp erosion in values, the prospect of a revival in many of these shares seems to be
If these shares must go back to their highs achieved in late 2017 or January, they would have to at least double from current levels
Currently, blue chips are the flavour of the season with domestic investors money moving into them from mid- and small-cap shares
Fund managers think it will be a while before the broader mid- and small-cap share segment makes a comeback
They will go with the tide for now.
