The speed at which stocks rerate excites us on the way up. But, they can also rattle us on the way down. Derating is happening at the same time as rerating.

The concurrent course of events is not new to our markets. When euphoria sets into one part of the market, it affects other parts too. Not too long ago, we saw investors selling stocks of other themes to buy financials. Then the season’s flavour changed to FMCG. Now, the flavour has moved to pharma. Through this three-phase shift in market-leading themes, we saw regular and continuous derating of value-based themes, commodities, and public sector companies.

It’s important to remember what usually happens when we rerate or derate companies absurdly. Corporate actions will kick in to make swift use of both trends. Promoters will do OFS, placements, and QIP where valuations are very high due to rerating. Where derating is too much, we will see promoters seek delisting, creeping acquisitions, M&A, and preferential placements.

Every situation will find its own response. Making our response sensible is all that matters.

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Posted on October 17, 2020

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