Testing Strengths

The Nifty is around new highs. But, we are seeing clear signs of weakness in small-caps, micro-caps and SME stocks. When the market mood is so upbeat, with mutual fund assets at all-time highs, SIP mobilization at historic levels, and folio count at the highest ever, one would expect the market to be very strong across categories.

But, that is not the case. Even within the Nifty, we are seeing distinct weakness in some stocks. The market expectations on the Nifty still remain bullish. Analysts see some steam left in the Nifty. But, nobody is showing the same confidence in the less liquid parts like small-caps and microcaps.

The recent circulars from the self-regulatory body of mutual funds are also a reason for the tentative mood among fund managers. There is an eerie silence and everyone is wondering how to weather this issue. Most managers know that a further correction is inevitable in illiquid stocks as funds may reduce exposure to avoid unpleasant discoveries in the stress test to be undertaken in funds.

On the other hand, they are also receiving fresh flows making it difficult for fund managers to find new ideas to deploy monies. Meanwhile, company promoters are selling their stocks to raise liquidity and these deals are being lapped up by mutual funds wanting to deploy fresh inflows. As the weeks progress towards the polls, we are likely to see softness in valuations of significant parts of the market. Importantly, buying will slow down, reducing investment anxiety significantly. But, this could only mean that notional profits in mutual funds may vaporise if the correction continues next week.

“To sell, or not to sell” is a serious worry for many investors. This decision needs to be addressed in a portfolio-centric manner, and extreme stock-specific decision-making is the need of the hour.

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