Small stocks lose sheen, tumbles nearly 24% in 2018

Small and midcaps stocks faced a rough ride this year as they slumped nearly 24 per cent as they were hit by regulatory changes, valuation concerns and volatile market conditions even as their bigger counterparts performed better.

In 2018, the BSE Smallcap index tumbled 23.52 per cent or 4,524.03 points while the Midcap index shed 13.37 per cent or 2,383.95 points, according to an analysis. While the smallcap and midcap scrips took a hit, the benchmark 30-share BSE Sensex gained 5.90 per cent or 2,011.5 points during this period.

“Small and midcaps went out of favour in 2018 due to regulatory changes adopted by the exchanges and Sebi/ RBI whereby traders got disincentivised to buy/ hold on to these shares for long,” Deepak Jasani, Head Retail Research at HDFC Securities, said.

According to him, disruptions due to technology and e-commerce also impacted the business models of quite a few companies. The weak show by smaller stocks were in sharp contrast to their blockbuster performance in 2017. Last year, the BSE Smallcap index zoomed 59.64 per cent or 7,184.59 points while the Midcap index rose 48.13 per cent or 5,791.06 points. During this period, the Sensex had gained only 27.91 per cent or 7,430.37 points.

“Rising interest rates accompanied by lower availability of credit affected the working capital cycle of some companies. Lack of entry barriers in most sectors meant that capacity buildup was more than necessary even as financiers were lax in funding projects till upto a few years back. Lastly in some cases valuations which has risen abnormally high earlier reverted to their mean,” Jasani noted.

From its all time high of 18,321.37 on January 9 this year, the Midcap index hit its 52-week low of 13,538.62 on October 9. Same was the case with the Smallcap index which touched its one-year low of 13,396.84 on October 9. The index had reached a record high of 20,183.45 on January 15.

The blue-chip Sensex had touched its all time peak of 38,989.65 on August 29 this year. “The fall of midcaps and smallcaps is not an answer to an “if” question but to a “when” question as these stocks were trading at sky-high valuations. Therefore, it was obvious that such high valuation does not last forever and a mean reverting correction was a certainty,” Jimeet Modi, Founder & CEO of Samco Securities and StockNote said.

Market participants said that smaller stocks are generally bought by domestic investors, while overseas investors focus on blue-chips.“Mid and smallcaps were hugely impacted by a change in Sebi’s category or definition of mcap, implementation of ASM system (Additional Surveillance Measure) and IL&FS default,” Vinod Nair, Head of Research at Geojit Financial Services said. The midcap index tracks companies with a market valuation that is on an average one-fifth of large firms. In the case of smallcap firms, the valuation is almost a tenth of the larger counterparts.

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