Decoded: How mid-cap and small-cap investors should react to market volatility

Published: December 5, 2018 1:16 AM

This market is going to reward efficiency so focus more on companies with above industry average OPMs. State-owned banks should be avoided as the extent of bad loans and recapitalisation are still not clear.

The question is what should these investors do in such cases?

By Ketan Shah

In the last few months, those who have invested in mid-cap stocks may have had a nasty surprise. Even as the Nifty was flat to positive overall, the mid-cap stocks were down by 15-20% on an average. In specific cases, the stocks were down by 40-50%. Since small investors are typically invested in mid-cap and small-cap stocks, this would have been really difficult.
The question is what should these investors do in such cases?

Decide when to exit

This is more relevant for small investors who are invested in mid- and small-cap stocks. For example, if you are willing to take a risk of up to 10% or 15% on the stock, then keep that as your cut-off point. At that point, just exit the stock and take a fresh view later on. The more consumer driven sectors like FMCG and auto have not been overly impacted. But banks have been a lot more vulnerable to the correction. Take a view based on whether the specific sector is vulnerable or not.
At present, investors should avoid high leverage companies. This market is going to reward efficiency, so focus more on companies with above industry average operating profit margins (OPM). State-owned banks should be avoided as the extent of bad loans and recapitalisation is still not clear.

Positive triggers

There have been a lot of triggers for consumption in the last couple of years. The GST has helped make a lot of items of mass consumption cheaper. The government has given a big boost to urban consumption via liberal payouts in the last Pay Commission, especially to retirees and the armed forces. Always keep your focus in these times on such sectors with positive triggers.
Check for sectors that are holding value despite the carnage in the markets. There is a bigger story and try to focus on that. Two sectors—automobiles and FMCG have hardly corrected compared to the Nifty as can be seen from the relative price charts. That is where the strength is, and not without reason. Always bet on strength in these kind of markets and remodel your holdings accordingly.
Focus on quality stocks at attractive prices. Mid-caps have already seen corrections in the past and you will find that the quality mid cap stocks with robust business models and steady cash flows are showing strength in weak markets. It makes a case for selective mid-caps with strong growth and robust margins.

Restructure portfolio

Do not worry about losses on the losers. Rejoice on the fact that you are getting quality stocks at attractive prices. If there was that large cap stock available 20% lower and you always wanted to buy, just go ahead and buy it. This is the time to rehash your portfolio completely. Park your funds temporarily in other assets if you are not too sure. It is fine to miss 5% of the bounce as long as you are going to eventually buy with a lot more conviction. But be open to the idea of parking your money in assets like bonds, liquids or even gold funds for a short period of time till there is clarity in the markets. If you are still confused, adopt a systematic approach to putting money into equity funds instead of direct equities. Fund managers will give you the benefit of professional management and the systematic approach will give you the benefit of rupee cost averaging.

The writer is chief revenue officer,
Angel Broking

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