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Collapse in Small/Mid Caps

The share prices of small and mid cap companies have been collapsing in 2018. The fall in their prices in just last month has been an average 10%. For all those who invested in these shares since the start of the bull run in 2014 and made spectacular gains, 2018 has been a dismal year of losses. These shares had risen by about 50% last year, but now most of them trade at prices 40 to 50% below their peak levels. The market experts say confidently that the prices of these shares will fall even more. It all started with a bull run that began in 2014, when these small/mid cap shares were the best performers on the stock markets and gave fabulous returns. Investors rushed in with more investments. But it was an unsustainable rally, without the support of fundamentals and now everyone is desperate to exit.

The primary reason for such a steep fall in prices of these shares is that the rally and upward rise in share prices was not supported by increase in corporate earnings. Their valuation was thus very expensive and was not sustainable. It was bound to collapse and it did. Blind speculation finally gave way to reasoning, leading to a collapse in share prices. Foreign investors have hurriedly exited, now reluctant to pay a premium for the India story, because of the very slow growth in corporate earnings.

Apart from the slow growth in corporate earnings of these companies, with auditors resigning in many cases, as also an unsurge in cases of corporate governance violations, there has been an erosion in faith in the management and performance of these companies. The shares thus now trade at a discount and not at a super premium as it then was. The fact that there has been an earnings recession in the past 3-4 years, has only aggravated these concerns of investors.  

As the share prices fall rapidly and numerous instances of doubtful/suspect financial statements surfaced, SEBI has increased its surveillance of many of these stocks, putting off both speculators and investors away from them. Seasoned investors have chosen to exit from these shares and invest in shares of blue chip companies. The other reasons for the sharp dip in prices of these shares are that investors become nervous in an election year and tend to exit from the stock markets, which India is presently experiencing. A strong dollar, a waning India story, a change in SEBI regulations and the oil price rise have also accentuated the fall in share prices.

Investing in shares of companies, which are devoid of corporate earnings is always very risky, with potential loss of capital, which many of these investors face today. Their litany of woes has only begun, since with no significant improvement in corporate earnings, the fall in prices will continue further. ')}

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