The sharp comeback in pharma stocks, the buyback announcement by TCS, and the sustained weakness in midcaps send out clear signals. The markets are at the crossroads. Liquidity and its power to sustain equity valuations have been overestimated. You may wonder why this is happening. As a performance hugging universe, mutual funds have been caught off-guard on defensives.
This is a double whammy as they have already spent two quarters coping with their earlier misjudgment in midcaps. The lack of anticipation and the tendency to avoid risk cut both ways. When one refuses to move away from the herd, it can be costly as the market trends tend to shift away very swiftly. The sharp rally in IT stocks in Q1 caught the MF’s off-guard. Now, it seems to be pharma’s turn.
Clearly, overall capital flows towards defensives is gaining momentum. This puts the growth stocks at the risk of seeing outflows as performance chasing public investors will be left with no alternative but to buy defensives. The coming weeks will see more churn. The markets don’t seem to have the liquidity to even enable requirements of this churn.
Clearly, a lot of public investors seem to be caught off guard right now. The crossroads are approaching at a time when they aren’t ready to quickly decide which way to go.
