It has been a parabolic move since the 2020 lows. Relative to the rally, the selloff we are seeing in mid and the small cap indices is negligible. But is there a pattern here? Where is the acute selling coming from and who is selling?
You got it correctly when you said relative to the rally that we have seen. The rally has been stupendous. We are seeing the markets give away so little that I don’t even know what the noise is about. The problem in the markets today is that everything is very expensive, everything is so frothy. People are not buying these midcap companies because they see value in them or that they are bullish in the sector. People seem to be buying because a friend of theirs bought something and it went up 50%. So they think it is a good idea to buy it too. It is nearing bubble territory. It would be prudent for people to exercise caution, diversify and have enough risk mitigation metrics at hand so if things were to turn, they are not affected too badly.
If I were just to understand the texture and the nature of the selling, is it largely by HNIs or is it largely from retail?
I would say across both the segments. It is not selling as much as it is profit booking in my opinion. A lot of retail who entered in the last six months have made a tremendous return and are shaving off some of their positions to preserve capital and profit is probably a good thing and net-net good for the markets.
Experts have been saying that this is not a repeat of 2018. So, if not a repeat of 2018, then is it also a good time to buy in case you have missed the earlier rally?
I am personally fairly pessimistic on valuations today. Hindsight is very short and our memories are not very long, but if you go back in time, a decade or two ago, we witnessed prolonged bear markets which went on for five, six years. People seem to be driven by what they have witnessed in the last year and a half and they are buying on the back of the momentum and the liquidity surge in the markets.
If you were to ask me whether this will continue forever or into the foreseeable future, I would probably bet against it. There will be a reckoning that at some point a company which is not doing too well but is valued at a very high price or premium, will have to correct and come back to the long-term mean and average valuations. So I would advocate caution and personally I am not entering into the midcap space or recommending that to anybody.
After a couple of days of selling, today a recovery is taking place in midcap stocks. Will this have any impact on the primary markets? We have got four IPOs this week. Also, a whole host of new age companies are planning to tap the markets?
Even on the IPO front, for Zomato or any of the slew of IPOs which are scheduled shortly, the valuations do not seem very attractive. I feel there is a bubble in many markets across the world. To a large extent, the bubble in the primary markets might be a bit bigger than the one in the secondary markets today.
Before Zomato, I always thought retail will be more mindful of profits and valuations and really think about the companies that they invest in. But looking at the premium the Zomato stock is trading at, that is out of the door. But both in the private and in the public markets, things seem quite frothy right now and we do not seem to be at that point in the cycle where fresh people should come in and start to build portfolios here.
