Of late, the weathered investors in the market have started to question the sustainability of the bull run, especially, the one that was founded on liquidity and amid considerable damage to the real economy.
They point to the astonishing gains in the shares of Info Edge India, Avenue Supermarts, PVR, Tanla Platforms and few other smallcap names to suggest that this rally may be getting out of hand.
“A downside of this has been unwarranted exuberance in low quality smallcaps. Against this backdrop, we reiterate that quality is non-negotiable and more so in smallcaps,” Saurabh Mukherjea, Founder and Chief Investment Officer at Marcellus Investment Manager, argued in a recent note to clients.
While market veterans are looking at the stupendous gains in some of the midcap and smallcap stocks to raise alarm bells, what should really set the cat among the pigeons is what is happening in the darkest stretches of India’s stock market.
The top two stock exchanges — National Stock Exchange and BSE — categorise the listed scrips into certain groups. These groups are created on the basis of trading frequency, market capitalisation, compliance record and a few other metrics.
The best stocks in the market usually belong to ‘A’ Group followed by ‘B’ Group and the worst ones fall under the ‘Z’ Group.
‘Z’ Group stocks can be considered the outcasts of the investing world, these are companies that have failed to comply with listing norms, redress investor grievances, and some are part of insolvency proceedings and have suspect corporate governance or accounting quality.
However, it is this dark stretch of the domestic market where retail investors are flocking to in search of a quick buck, unaware of the landmine that they are treading and how it can blow on their faces as quickly as the gains they have made.
Data available on AceEquity showed the 71 stocks in the ‘Z’ Group category as on Friday have given an average return of 215 per cent since the beginning of April, with the highest return being 819 per cent delivered by Jet Airways, which hasn’t flown a plane since March.
These 71 counters have also seen a dramatic increase in investors participation since April with an average increase in trading volume of 1,425 per cent. In the case of one stock, Thiru Arooran Sugars, trading volumes have grown 3,660 per cent since April, reflecting the intensity of the frenzy among investors.
The surge in trading activity and the price of these scrips are not even the worst part. The worst part is the ignorance on part of the investors that have bought, and are still holding, these stocks.
“These are manipulated by punters and driven on speculation,” said Amit Kumar Gupta, Head of Portfolio Management Service at Adroit Financial Services.
The alarming fact about these stocks is that out of the 71 scrips, about 10 per cent of them will cease to trade on the stock exchanges by the mid of this year.
Shares like Uniply Industries, STI India, Cox & Kings Financial Services, Talwalkars Healthclubs and KSS, which have risen 3-100 per cent in last nine months, are likely to see a permanent trading halt by June 14.
This raises concerns that investors who have actively bought these stocks over the past nine months are at the risk of losing all their money as they will face a considerable challenge in liquidating their positions ahead of the approaching trading suspensions, said market participants.
While an intense debate rages on social media and business news channels if the stock market is heading into the bubble zone, it appears that some parts of India’s stock market are already in one.