The Midcap Crash: What do you do now?

The current Nifty value has created a major issue for investment advisors and managers as they take repeat calls from investors asking why their portfolios are down even as the index is holding near its all time highs.

One thing that the index hides is the performance of non Nifty stocks in the current year – &P BSE Midcap Index is down 11.53 per cent, the Smallcap Index is down 14.05 per cent, while the Nifty is up 4.04 per cent. And as is usual, since a  large amount of domestic inflows have come in the 10000- 10800 range in markets, it is most likely that most of these portfolios especially the new ones are sitting on losses varying from 5%- 30% depending on where the moneys were invested.

Does that call for panic? No of course not. As we bat on a strong long term wicket, a couple of maiden overs here or there shouldn’t matter!

A part of this fall was already being factored in around January when the international newsflow became negative (Prabhudas Lilladher had issued a warning on Midcaps suffering in January 2018 and recommended sticking to largecaps) and results weren’t too impressive for Q3FY 2018. Added to that was the rumours on increased taxation on long term gains etc and it was clear that we were in for a torrid situation. Whats happening therefore is part of what can be called a natural correction that stabilizes the markets and reduces excess leverage – and therefore for longer term investors a good reason to claw back into markets with caution and good picks- as its likely that over the next few weeks we get a large number of excellent stocks trading around 52 week lows. Stocks like ACC, Bank of Baroda, Bharat Electronics, Dalmia Bharat, EID Parry, Grasim, HAL, HCC , IL&FS Transportation Networks , NTPC, NHPC, NBCC, Pincon Spirit, PNB Housing, Punj Lloyd, Shree Cement, Suzlon Energy, UltraTech Cement and UPL are some of the well known stocks which hit fresh 52-week lows in the last one week.

What Should You do Now?

A market fall is a good reason to assess your portfolio and realign to the emerging situation. In fact , it opens up many new stocks for you to assess which you probably wouldn’t have entered earlier fearing exactly this kind of a situation. Now is probably a good time to reassess some of these stocks and replace duds with star names.

Our latest India Strategy report presents a wide variety of stocks (https://www.plindia.com/ViewReport.aspx?rpt=2423) – see Page 18 for summary – that we refer to as our “top picks”. This list presents potential fundamentally driven upsides which one can use for a careful structuring of the portfolio.

One easy way is to do a like to like matching – and replacement. Lets say for example you bought Dalmia Bharat at 3300 and don’t have a very strong reason to hold on to it personally – at current prices it is close to 33% down from your investment price. A simple thing therefore would be to replace this with the likes of Titan, Yes Bank, SBI Life, IGL and Rallis – all of which show a 30% upside in our report.

Lets say you had a more harrowing experience and are now down 50% on some stocks – and every day is a new low! Here again , and at least till markets stabilize or you have more cash or conviction, you might prefer to invest in our recommendations like Indian Oil, Tata Steel, JSPL, Sadbhav Engineering and Heidelberg Cement all of which present upsides of more than 50% or so from current prices.

While a 30% down means a 60% upside and a 50% fall means 100% upsides, this shuffle will allow you to breathe easy and give you time to select another batch of better stocks once markets recover. Remember : Protecting capital is more important than being right when the  chips are down.

Not wanting to book losses etc are all weak arguments for not doing this. Given that the correction is likely to be very painful if it indeed does happen, you should definitely look at exiting weaker names and replace them with quality – if not the above then choose your own or check with us. But act!

Its your money! Write to us at advisory@plindia.com for any more information you might want or advice on specific stocks.

 

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