Non fundamental events aggravated the panic in broader markets in last nine months of 2018. Since January 2018, NSE Nifty 50 grew by 4% where as mid and small caps represented by NSE Midcap 100 and NSE Small cap 100 fell by 19% and 32% respectively. The mid and small caps have had a dream run over large caps in 5 years ending 2017– compounding at around 20% (Nifty midcap 100 and small cap 100 full indices) annually till Dec 2017, higher than NSE Nifty’s 12% p.a. And a correction was natural. Four non-fundamental reasons magnified the fall:
First, In October 2017, SEBI released a circular on re-categorisation and rationalisation of Mutual Funds Scheme. To oversimplify, it barred large and mid cap schemes from investing in small caps. By current SEBI definition small caps are over 60% of actively traded companies on the NSE. Mutual funds were compelled to sell these stocks amidst narrowing liquidity that amplified the fall.
Second, the SEBI came out with an ASM list (Additional Surveillance Measure) to curb volatility in prices of some small and mid cap stocks. Ironically, exactly the opposite happened. The measure inter alia required 100% margin for trading in these stocks. Significant liquidity dried post this announcement and further accentuated the fall. The ASM list is not a vote on fundamentals of the company. One of our stocks that was included in ASM offered us attractive opportunity to add.
Third, in April 2018, NSE announced changes to NSE Midcap 100 constituents whereby 46 of 100 stocks of the then mid cap index were excluded from index. This is significantly large number. Many mutual funds that mimic index, sold these excluded stocks causing corrections.
And lastly fourth, in late September as an overreaction to loan default event at an infrastructure NBFC (IL&FS) (non banking finance company) , there was a scare in the entire NBFCs space including housing finance about asset liability mismatch (crudely, debt repayable being higher than collections on advances) and stocks fell over 40% in a day. In a second order effect, many mid caps became small cap necessitating sell offs from large cap and midcap mutual fund schemes (first reason above).
Value often emerges when everything gets painted by same fear brush. We eagerly became counterparty to this non-fundamental based selling. While such price corrections do cause temporary pain, they also give one of the best times for a discerning stock picker.