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Shankar Sharma says smallcap pain technical, not fundamental

NEW DELHI: The BSE Sensex may have scaled a fresh all-time high in early trade on Tuesday, but that has not done much to assuage the pain in smallcap stocks, which have witnessed a severe correction this calendar.

The BSE Smallcap index is down 18 per cent year to date, against a 12.5 per cent drop in the BSE Midcap index and an 8.5 per cent surge in the Sensex.

But ace investor Shankar Sharma is not perturbed. He says fundamentals are still intact in the smallcaps. The pressure in the smallcap space has come largely from technical factors.

“Two types of bear markets: fundamental & technical. Fundamentals in smallcaps are intact. So what’s caused the meltdown? Technical factors i.e. trading curbs, hence low liquidity, hence forced selling into illiquidity, leading to a domino effect collapse of the entire segment,” Sharma said in a tweet on Monday.

In follow up to his ealier post, Sharma on Tuesday tweeted: “Good news is that technical bear markets end quicker than fundamental bear markets. (Remember 1987 US bear market, caused by Program Trading?). That said, these curbs need serious reconsideration as small Investors have been decimated last few months, sentiment is damaged badly.”

The 30-share Sensex scaled a lifetime high of 36,902 on Tuesday. The BSE Smallcap index was up 1.74 per cent at 16,143 at around 11.10 am (IST).

From the smallcap space, stocks like Gitanjali Gems, SRS Real Infrastructure, Vakrangee, Talwalkars Better Value, JBF Industries and Kwality have plunged over 85 per cent on a year-to-date basis, while Nelco, Excel Industries, Indiabulls Ventures, Excel Crop Care and Firstsource Solutions risen by a similar percentage during the same period.

Market experts believe stock prices slipped mainly because while valuations soared, with the S&P BSE Midcap and Smallcap indices advancing up to 58 per cent last year, earnings did not keep up pace.

Factors like Sebi’s re-categorisation of mutual fund schemes, a clampdown on midcap stocks by the stock exchanges under the ASM/GSM code accelerated the fall.

In an interaction with ETNow, Vinay Paharia of Union AMC said the market saw a monster rally in the entire smallcap and midcap segment over four to five years. Through this phase, the smallcap and midcap indices delivered almost two-times more return compared with their largecap peer and, hence, even after this correction, someone who had invested in some of these names has actually earned a healthy return.

“Having said that, one needs to keep in mind that this segment falls in the high risk-high reward category; high risk means high levels of drawdown can be expected. This is what we are experiencing now. One needs to look at it from a longer-time perspective on a risk-adjusted basis,” he added.
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