i) Rejig in Portfolio by Mutual Funds to meet guidelines defined by SEBI
ii) Introduction of Additional Surveillance Measures by SEBI to curb volatility
iii) Auditors exit from various companies on fear of stringent action from authorities
iv) Unfavourable macros with increasing crude oil prices and depreciating rupee
v) Trade war fears between US and China, rising interest rates, continuous selling by FIIs
vi) Panic in market due to liquidity concerns, IL&FS default on debt repayments
vii) Political uncertainty with setback of BJP in assembly elections in 3 key states
viii) Concerns in market due to severe sell off in large caps stocks like Zee, Tata Motors
ix) Panic arising due to stock prices of ADAG companies falling line nine pins
x) Defaults on payment by well known companies like DHFL, Cox & Kings etc
xi) Economic slowdown with automobiles sales hitting multi years lows in 2019
xii) Selling by foreign investors after introduction of super rich tax by FM in the Budget
If you wish to know what will happen to small cap stocks over next 3 to 6 months, honestly we do not know. Probability of recovery in beaten down small caps from current levels can't be ruled out but whether it will happen over next 3 to 6 months, or will take longer time will depend upon revival in earning growth. With slowdown in economy, the small caps may take a bit longer time to recover. We expect revival to happen sooner than later considering that Govt will take all the corrective actions to get economic growth back on track.
Moreover, we are almost sure that BSE Small Index will not only recover but also also make new highs over next 3 to 5 years or earlier. Many small cap companies with good fundamentals will not only see stock prices back to their previous highs but also deliver decent returns on investments in coming years. Small Caps are most volatile due to low liquidity, they rise the most during bull run and similarly fall the most during bear market like we witnessed over last 18 months. Volatility drives the stock price in short term however its only the earning growth of a company which drives its stock price in long run.
BSE Small Cap Index has not delivered negative returns for 2 consecutive years in past 16 years
BSE Small Cap Index went up by 69% in 2014 and during the same year numerous small and mid cap stocks turned multi-bagger. Scenario was similar in 2017 when BSE Small Cap Index rallied by 58%, since Jan 2018 broader market went into bear grip with significant sell off in many small and mid caps due to expensive valuations and series of negatives developments followed by slowdown in economy.
The reason is the carnage in stock prices of many well-known small and mid cap companies. Individual small and mid cap stocks are touching 52-week lows every other day and individual damage to most of the stocks in this category is to the tune of 50-60%, some even more than that. Such severe and fast erosion of capital in small and mid caps have butchered investors interest towards this category. Retail investors have taken the back foot and lost their faith and conviction towards investing in small and mid caps due to existing pain in their portfolios.
However, we are quite excited about opportunities emerging in small and mid cap space during this year. The fall in stock prices of many small and mid caps by more than 50% from their peaks has not happened for the first time. This has happened in past and companies with good business fundamentals have always bounced back strongly later delivering multi-bagger returns. When overall market sentiments are negative like we are witnessing now, quality businesses also face the heat. As bad stocks go down, good stocks go down with them too. But good companies make a stronger come back with earning revival once economy cycle starts its upturn.
We have been saying this time and again - don’t try to time the market. We firmly believe that to get the best returns in the long term, investors should invest in a staggered and disciplined manner irrespective of market conditions. Investing through ups and downs of the market lets your investment grow and averages the purchasing cost. Equity investment is a serious business meant for long term investors. Trying to get in when the market goes up and getting out when there is a correction does not help you to create wealth.
Let us share some valuable insights to make you understand why we believe buying the right set of small and mid caps now can be a massive wealth creating once in a decade opportunity. To make our readers understand bull as well as bear phase of markets, we have covered long term monthly charts of some of our own small and mid cap stocks recommendations (released under Hidden Gems and Value Picks) over last 9 years which at one point of time were down by 50% to 70% from their peak but turned out to be mega multibagger stocks in longer run delivering upto 64X returns.
Below are the Monthly Chart (since Jan'10) of 8 Multibagger Small Cap Stocks released under Hidden Gems service.
3. Roto Pumps (Hidden Gem released on 05th Aug'12) - Read Old Report
Tide to turn favourable sooner than later for small cap stocks