After outstripping gains clocked by Sensex and Nifty 50 for most of the year, midcap and small cap stocks came under pressure on Tuesday, September 12, 2023. However, if the unconfirmed buzz in the street holds any water, profit booking may not be the sole reason for this sudden appearance of cracks in many of the counters in these two stock categories.
It is being bandied about that one of the reasons for the rout, which has seen the Midcap and Small Cap Indices record their biggest single-day fall of 2023 with over 90 percent of the constituents closing in the red, could be the possible liquidation of a proprietary portfolio by a hedge fund. This liquidation, unconfirmed speculation suggests, may well be coming in the wake of the exit of its prop book’s manager in what (is being suggested) could be less than above-board circumstances.
While Social media was abuzz with chatter of liquidation by a hedge fund in midcap and small cap stocks in India, the provisional data last evening doesn’t suggest any alarm bells.
Infact, CNBC-TV18 spoke to multiple market participants (Including brokers), who service the hedge fund being named in social media posts, but preliminary feedback suggests the funds exposure in midcap and smallcaps stocks may not not be more than $300 million. A senior sales executive at a leading Institutional brokerage on condition of anonymity said, “The fund manager who has reportedly been fired at hedge fund as per social media posts, used to typically manage 25-30 mid and smallcap stocks in his portfolio where single exposure is unlikely to have been more than $10 million”.
CNBC-TV18 has reached out to the hedge fund being named in social media posts and is waiting for a response.
Remember, since March 31, 2023, the Nifty 50 has risen just 15 percent, while the Midcap Index has jumped 38 percent and the Small Cap Index has surged 44 percent.
This outperformance has also been fuelled by, and in turn fuelled, a sharp rise in the inflows into midcap and small cap funds. According to Kotak Institutional Equities, the last four months have seen over Rs 21,500 crores flow into Mid & Small Cap funds, while Large and FlexiCap funds have seen fresh investor money to the tune of a markedly lower Rs 6,000 crores.
CNBC-TV18 has reached out to SEBI on whether it is taking cognizance of these rumours and ‘viral posts’, and is awaiting a response. This copy will be updated as and when such response comes in.
This Rs 788 crore figure makes it highly unlikely that a portfolio liquidation has been in progress, especially considering the 'viral' content doing the rounds indicates a portfolio size of close to Rs 4,000 crore. Also, a large portion of the DII net buy figure was on account of the block deal in L&T Finance, and since the seller was a Foreign Direct Investor (FDI), the number is not captured in the FII net sell figure.
Of course, the final FII and DII numbers which will be released on the morning of September 13, will could be different from the provisional numbers, but the deviation is unlikely to be of such magnitude as to lend the market buzz of a possible portfolio liquidation too much credence.
Nevertheless, if a portfolio liquidation is one of the factors playing out on Dalal Street, the obvious educated guess would be that there is a good chance this sell-off may continue for a couple of sessions more; so further pain in midcap and small cap counters cannot be ruled out. How much of an lingering effect this could have — or how long it may last — is anybody’s guess. Conversely, should the rumour mills turn out to be off the mark, the markets could just swing the other way. So tread cautiously.
First Published: Sept 12, 2023 8:17 PM IST
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