Despite a sharp correction, it may still be too early to buy mid caps
The year 2018 has been one of the worst years for mid cap and small cap stocks in the last 7 years. The BSE mid cap index was down by 14.4% for the year while the small cap index was down by nearly 24%. This is the overall index. The actual damage in specific stocks was as bad as 70-80%. What exactly drove this carnage in these mid cap and small cap stocks?
LTCG and ASM…
In the Union Budget 2018, the FM imposed capital tax on long term equity gains at the rate of 10% above Rs.1 lakh. This led to a virtual sell off in most of the mid cap and small cap names as individual and institutional investors tried to exit these stocks before the cutoff date of 31st March. Most of the mid cap and small cap stocks hardly recovered from that point. There were two more reasons for this sharp fall. Firstly, the additional special margins (ASM) imposed by SEBI on small and mid cap stocks was a major blow to the speculative demand that most of these stocks attracted. With speculation and intraday trading diminished, there was rampant delivery selling in these stocks. Secondly, the SEBI directive to mutual funds to reclassify their schemes, also forced most of the mid cap and small cap stocks to be sold as it did not fit into their larger definition. All these factors actually combined to result in a sharp correction in these mid cap and small cap stocks which saw a bad year.
Macros did not support
At a macro level, two important factors worked against these mid cap and small cap stocks. The sharp rise in the oil prices worked against these stocks. Over the last four years, the sharp fall in crude oil prices had resulted in a sharp fall in input costs and these mid cap and small cap stocks had benefited the most from weak oil prices. With oil touching a high of $86/bbl, the pressure was too much and that accentuated the sell-off. By the time the price of crude reversed, most of the damage to these stocks was done. The sharp weakness in the rupee also worked against them. Above all, the key corporate governance issues and concerns over transparency also spooked most of the mid cap and small stocks. This added to the sell-off.
Not yet time to buy
The damage in the last one year to mid cap and small stocks has been quite sharp. While specific stocks in the mid and small cap space may see some traction, at an index level there may not be much respite. Corporate governance issues are still quite a challenge and that will keep these stocks on tenterhooks. Also the institutional appetite is likely to be much weaker with most of the domestic funds going slow on mid cap fund inflows. Year 2019 may continue to be a challenging year for the mid cap and small cap stocks. It may be too early to get your shopping carts!
