Bottom-Fishing, Anybody?

After a steep fall, a number of indicators points to why this is a good time to start buying smaller company stocks

- Samar SrivaStava

Good news and good prices rarely come together.

The last time mid and small caps were this cheap was in mid-2013. Then the Indian economy seemed to be coming apart for a number of reasons. With the US Federal Reserve withdrawing its Quantitative Easing programme, the threat of an increase in the cost of capital had pushed up interest rates and had resulted in foreign investors dumping Indian equities. India’s crude oil basket stood at $108 a barrel.

Unsurprisingly, the rupee tumbled 13 percent to 68 and the markets sold off—the Sensex fell 8 percent to 18,816. As investors rushed for the exits, smaller companies took it on the chin with some quality franchises losing as much as half their value in August 2013 alone. Stocks quoting at an eight percent dividend yield had no takers. No matter how attractive the valuations were, few were willing to put their money to work in these businesses.

Six years on, it’s clear that that was a great buying opportunity. That September, Narendra Modi’s announcement as the prime ministerial candidate started a rally that saw the Nifty Midcap 100 Index compounding at 22.9 percent a year till August 2018. There were several instances of individual stocks rising 10-fold in that period. Sure, there were other aiding factors that couldn’t have been foreseen then— the collapse in oil prices and food inflation and subsequent lowering of interest rates. But those brave enough to buy smaller companies then have had a profitable ride.