The genesis for the current meltdown in Indian markets must be understood well and remembered for a long time to come. Interestingly, the indices held steady during this period.  So, what caused this downslide?

Broadly, the markets showed overwhelming faith in smaller companies over the index bellwethers between 2015 and 2017. The poor performance of index bellwethers like tech and pharma during this period contributed to the heavy concentration of investor interest in midcaps and small caps.

The belief that small and mid-cap companies will be insulated from macroeconomic challenges grew on the investor psyche between 2015 and 2017. During this phase, investors gradually moved away from large caps and raised their exposure to midcaps, small caps, and even microcaps. The heavy concentration of fund flows clearly raised returns and valuations in this phase to all-time highs. Valuations spiked up leading to a premium in midcap valuations over even the indices.  This unusual trend persisted for months together. Investors knew this was unusual. But, nobody was ready to go into cash.

It is under these circumstances that valuations in midcaps cracked. With economic macros like exchange rate, oil prices, and inflation turning the markets may be on the cusp of a new trend. This is a good time for contrarian, defensive investing.

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