Midcaps & Smallcaps, The New IPOs & more

Morning Otter community. Today’s edition brings to you: Navigating current market volatility; China-India territory dispute heats; Elections fervor rises; IPOs coming up

TODAY’S HIGHLIGHTS

• Indian exports rise by 11.9% 💸, but trade deficit gap remains at USD18.71 billion!

• Karnataka water crisis 💧to dampen its agriculture output in 2024

• General LS elections are to be conducted from April 19 to June 1, vote counting on June 4; All bets on Modi government

• China refuses to back down from Arunachal Pradesh, military claims it as its territory 🪖🇨🇳

• RCB crowned title winner in WPL 2024 🏏🏆

THE BIGGER PICTURE

Navigating the Mid & Small Caps

Begin your week by catching up on the markets. In case you missed the small and mid-cap saga, and of course, the epic fall of last Wednesday!

Indian stocks have been on a rollercoaster ride. An influx of first-time retail investors into a post-Covid recovering market led to an unprecedented domestic investment inflow, sparking overactivity. This surge in capital injection resulted in positive market sentiment, and quick returns, and attracted even more capital, with more investors eager to join the fray until it all came crashing down.

The Market Scenario

With the market appearing bullish and resilient, SEBI applied the brakes by mandating a stress test on mid and small-cap mutual fund schemes. SEBI's move aimed to address the flagged risks of overheating and guide funds to limit purchases.

Why Did SEBI Introduce This Measure?

1. Portfolio Protection: To shield portfolios against underperformance caused by drawdowns, which signify the loss of equity capital. Despite growing by 40% to 50% last year, Nifty mid and small-cap indices failed to meet their benchmark returns. In case of significant price drops due to unforeseen circumstances, small caps require 5.5 years to recover to their previous peak, compared to 2.5 years for large caps.

2. Market Stability: Mutual fund products are structured to provide easy cash-out exits to investors. Therefore, assessing fund resilience to bearish market turns and the ease of liquidity of these schemes is crucial to ensure all investors can redeem their investments, especially under adverse market conditions.

3. Accountability: The stress tests also serve as an exercise to check the liquidity sensitivity of fund managers. By disclosing crucial information on mutual fund asset health, SEBI aims to enhance transparency and focus on internal risk management for fund managers.

Results of the Stress Test

According to data collated by the Association of Mutual Funds in India (AMFI), small-cap portfolios would take between 60 and 3 days to liquidate 50% of their assets in case of heavy redemption, while mid-cap funds can offload 50% of their investment in a maximum of 34 days. Large fund houses are at higher risk, requiring anywhere between 42 to 60 days to sell 50% of their assets.

Market Reaction

Following the stress test, SEBI advised all small and mid-cap funds to make staggered purchases, though this isn’t mandatory yet. Both Sensex and Nifty logged sharp falls, with a wipeout of Rs.14 lakh crores capital. Small caps experienced a 7% correction as a result.

Stock Overvaluation?

This correction might cause market sentiment to shift towards large caps for now. While it's often challenging to determine when a stock is overvalued, focusing on quality stocks with a solid track record of returns over many years is advisable over-relying on projections.

SEBI's market stabilization measures seem to have achieved their goals of eliminating current small-cap overvaluation and alerting investors and fund managers to safeguard against potential drawdowns.

The Indian economy is currently experiencing investment-driven growth, with core inflation at a 12-year low and a GDP of 8.4% for Q3FY24, indicating a Goldilocks moment. As the debate over the Indian economy potentially overheating continues amidst mixed signals, one fire seems to have been put out. The question now remains: how many more fires are yet to be extinguished?

THE MARKET MOVEMENT

1. IPO: Chatha Foods, Omfurn India FPO, Vishwas Agri Seeds to open for subscription

2. Power: KPI wins Maharashtra power project bid, 🔋 stock goes up by 5%📈

3. Defence: Hindustan Aeronautics rallies after Rs. 2,980 cr defence contract

4. Finance: Paytm gets third-party app license for UPI payments, locks in at Rs.370 upper circuit

GEOPOLITICS SPOTLIGHT

1. Oil prices rise by 4%, as supply tightens 🌎🛢️

2. US stocks fall 🇺🇸🇺🇲 amid unexpected inflation report, bets on June interest rate cut

3. China’s economy stabilising, and factory output & investment are growing fast but domestic consumption still lagging

4. Putin wins 5th term Russian presidency with 87% support in preliminary results, exceeding previous record

TECH NEXUS

1. HUH? LinkedIn to add gaming to its platform in a bid to increase user engagement

2. 🤞 Tesla may enter Indian markets after the government promises to lower taxes on EV companies committing an investment of $500 million & manufacturing facility

3. Ethereum’s Dencun upgrade allows up to 99% gas fee deduction

4. India retracts advisory to tech companies for seeking approval on AI rollouts 😮

5. WHOA!!! Apple acquires AI startup, Darwin AI, to oversee manufacturing components 🦾