Small/mid-caps collapse post Uday Kotak’s bubble warning

Our Bureau Mumbai | Updated on January 18, 2018 Published on January 16, 2018

Tuesday saw panic selling in small- and mid-cap stocks on the back of warning by one of India’s richest bankers, Uday Kotak, of building of a stock market bubble. The BSE mid-cap index fell 1.74 per cent and the small-cap crashed 2.24 per cent, which is the most in over three months. Several stocks in both the indices crashed by 7-15 per cent. Key benchmark index Sensex was down 0.21 per cent while the broader index Nifty fell 0.38 per cent.

Kotak, Vice-Chairman, Kotak Mahindra Bank, in an interview to a newspaper expressed concerns over the surging stock market and India’s financial savings going into selective stocks. Kotak group is one of the pioneers of stock market funding and a key player who had a large number of foreign portfolio investors registered as clients.

“Money is coming to a broad funnel and it’s going into a narrow pipe where massive amount of Indian savers’ money is now going into a few hundred stocks,” Kotak told the interviewer. “And you come back to the question of how good is the governance of these companies. The amount of money that’s going into small- and mid-cap stocks is something on which we have to ask tough questions. You’re pushing all this (money) into a narrow funnel which inevitably runs the risk of a bubble,” said Uday Kotak.

“Kotak’s comments are being taken as a signal by the bulls that stock prices could be in the final leg of a melt-up,” said a head of foreign equity research desk in Mumbai.

The price to earnings (PE) multiple, a key measure of valuations in the current times, of the BSE Small-cap index stood at 129 while that for BSE Mid-cap index stood at 50. The PE for both the indices is higher than in the tech bubble of year 2000 and financial crisis of 2008. Then, it was mainly the leveraged margin funding bets that saw the markets crash.

Kotak also headed a SEBI committee which submitted a report last year on changes in corporate governance rules for listed firms. Talking on the same, he said, “Keep in mind now you have EPFO money, insurance money, pension, investors’ and savers’ money... People think nothing can go wrong. Micro (economic fundamentals) is improving but the speed at which stock prices are going up is even faster… The speed at which stock prices are going up is sheer money power,” he said.

Published on January 16, 2018

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