Of Our Views on the Recent Correction in Smallcaps and Index Facing the Brunt of Local Politics

Mon, 19 Mar Pre-Open

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From its peak in January 2018, the index has corrected 12.3%.

Does that bother you? If it does, I believe taking a look at history would help.

Let's look back at the significant market corrections which have happened this decade.

One that I can think of was in January and February of 2016 on concerns over China heading for recession. Stock markets in India reacted negatively to such an extent that the smallcap index corrected by 20% in a period of two months.

Stock Market Correction between January and February 2016

Date	Smallcap Index	Sensex Index
1-Jan-16	11,941	26,161
28-Feb-16	9,548	23,002
Loss	-20.0%	-12.1%

Source: ACE Equity

Let's see how the index has fared since 28^th February 2016.

The smallcap index has surged by 84% in absolute terms and has delivered a compounded annual growth rate (CAGR) of around 35% (vs 20% CAGR for Sensex).

Let's rewind a bit more.

At the beginning of the decade, the stock markets corrected significantly on concerns of Euro debt crisis. smallcap index corrected 17% in a period of two months from August to September 2011.

Stock Market Correction between August and September 2011

Date	Smallcap Index	Sensex Index
1-Aug-2011	8,284	18,314
30-Sep-2011	6,881	16,454
Loss	-16.9%	-10.2%

Source: ACE Equity

Since 30th September 2011 till date, the smallcap index has surged 155% in absolute terms and has delivered a compounded annual growth rate (CAGR) of around 16% (vs 12% CAGR for Sensex).

There are three points we are trying to make here:

• Despite the hefty short-term corrections, the smallcap index has delivered good returns in the long term
• Both the correction and the recovery have been sharper for smallcap Index than the benchmark index
• In both instances, the fall in the indices was on account of external factors and had nothing to do with the Indian economy.

Given the high valuations, the recent correction was long overdue and desired, given that the price to earnings ratio of smallcap index had reached 111 times. The recent correction, led the Hidden Treasure team to initiate a fresh coverage on a smallcap gem.

This chemical company is the market leader in the segment it operates in. The company's margins are the best in the industry...courtesy some unique competitive advantages it enjoys. With a conservative and experienced management at the helm of its affairs, the company seems set on a stable growth path. The icing on the cake is undemanding valuations. The Hidden Treasure team (subscription required) has released the report. Happy reading!

Markets Facing the Brunt of Local Politics

Market on Friday corrected by 1.5% on the back of a weak global sentiments and political issues. With Telegu Desam Party (TDP) exiting the National Democratic Alliance (NDA) and with Bhartiya Janta Party (BJP) losing the bypoll election in UP and Bihar, the sentiments may turn negative ahead of the general election in 2019 and state election in the current year. This in-turn may have a negative impact on the stock markets in the near term.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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