INDIA BUSINESS WORLD - JUNE 2006
THE MONTH THAT WAS...

LIQUIDITY TWISTER BLOWS AWAY SMALL & MIDCAPS

   ONE of the most absorbing stories in the Indian stock market has turned sour. Mid and small-cap scrips, which had captured the imagination of retail investors, have suddenly run out of steam.

The crash in these stocks may have dealt a body blow to retail investors — the Street's perennial losers who invariably enter the market at the wrong time. These investors were drawn to these scrips, which looked far cheaper compared to frontline stocks. Many medium and small-cap stocks hit their 52-week low values. While Sensex dipped 2% or 200.56 points, the BSE mid-cap index fell 6.3% and the small-cap index was down 6.9%.

Since May 10, when the market was at its peak, the BSE small-cap index has nosedived 33% to 5,256 while the mid-cap index has plummeted 28% to 4,319. The indices have fallen more than Sensex, which has dipped 23% to 9,757.

   “There has been a lot of panic selling from retail investors, who are finding it difficult to take a call in the wake of deteriorating market conditions. The market has been facing acute liquidity problem as there are absolutely no buyers. Retail clients could have diluted at least 40% of their portfolios over the past few weeks of meltdown,” said Indiabulls Securities director Gagan Banga.

Things have come to a point where a lot of brokers are being forced to shut their terminals since clients are unable to cough up additional margins due to severe cash crunch, said Mr Banga.

The trend in the BSE's B1 and B2 group shares, which generally house second-rung stocks, showed that 140 stocks touched 52-week lows. The list included stocks across sectors. Brokers said there has been a sharp fall in stocks of metal, capital goods and construction companies, which had risen multi-fold in the recent stock market boom.

A few brokers are still of the opinion that while there may be retail selling, the current fall in the market could have been more on account of selling from mutual funds facing redemption pressure.

   “It seems mutual funds which had floated mid-cap funds recently have been selling in the market. With the kind of volumes that was seen, there is a possibility that big HNIs could have sold in bulk,” according to Angel Broking chairman and managing director Dinesh Thakkar.

He, however, ruled out a possibility of any major retail selling either directly or through portfolio management schemes (PMS) run by brokerages.