Safer in a herd

The sharp decline in the price of NHPC shares the other day, and the same seen in quite a few medium and small-cap stocks in the recent past, highlights the risks investors face in holding highly illiquid stocks, exposed as they are to speculative attacks by market participants. That the phenomenon should have affected a company such as NHPC is an indication of how vulnerable stocks are. The state-owned company, after all, is engaged in power generation, which is a scarce commodity in the country and hence not subject to business risks the way high-end automobiles or cosmetics are. Moreover, its business model consists of impounding free flowing water and using it to generate electricity. As such, it is not exposed to cost pressures, the way other companies with operations that are raw material intensive are. There is little in its operations, then, to warrant any drastic revisions in future cash flows, justifying such dramatic share price corrections. Yet, that is precisely what has happened. Thankfully, the recent regulative initiative from SEBI should go some way towards addressing this menace. The decision to impose, with effect from April, a penalty on those placing a ‘buy’ at a higher price and simultaneously seeking to sell at a lower price within a one-hour trading cycle is a welcome move. That the seemingly irrational behaviour with regard to NHPC shares has, at its core, some speculative purpose hardly requires any elaboration. It would, perhaps, help if capital markets regulator also denies these players the privilege of covering their market exposure on a ‘net’ basis and, instead, ask them to do it on a ‘gross’ basis. This will have the effect of making the cost of financing the speculative scheme just that bit more expensive.

But the fact that the market as a whole is obsessed with a handful of high profile stocks isn’t also helping matters. The top 100 stocks at the country’s premier bourse, the National Stock Exchange, account for almost 80 per cent of the turnover. Clearly, retail investors would be better off avoiding any direct exposure to the small- and mid-cap stocks, and invest through the mutual fund route. The broad market index of the top 500 stocks (CNX 500) was down by 5 and 4 per cent, over a one and three-year respective time horizon. But mutual fund schemes, focused on small and mid cap stocks as their investment theme, have returned 10 and 5 per cent in the same period. That said, investors alone are not to be blamed. This is also a failure of the fund management industry itself in communicating the performance of mid- and small-cap stocks as a class. They aren’t doing enough to celebrate the successes of those in this sphere. The investor protection monies available with stock exchanges and the market regulator could be put to showcasing their strength – not of individual companies but as a class.

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