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Yes, I got it wrong, says Porinju. But that’s not good enough reason to sell

Porinju said it he expected the elections to be a turning point for equities.

, ETMarkets.com|
Updated: Jul 19, 2019, 11.13 AM IST
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Porinju---BCCL
Last month, smallcap-focused PMSes met with the biggest disappointment, as none of the 16 schemes could create wealth for investors.
NEW DELHI: If you are among the investors who are stuck with their smallcap bets, you might want to consider four key aspects before deciding on whether to stay put or run away from the underperforming stocks.

Porinju Veliyath of Equity Intelligence, often called the smallcap czar of Dalal Street, says he is still holding on to a few underperforming stocks in his portfolio, as the decision to sell them to shift to other opportunities hinges on not just return, but many aspects.

The first, he says, is to see whether the original investment thesis has been jeopardised permanently or delayed indefinitely, which would make shifting a better decision than waiting, Porinju said in a letter to clients on Thursday.

The decision, Porinju said, would also depend on what would be the implicit cost of liquidating the investment in a sentimentally depressed market devoid of buyer participation.

Besides, there is also the question of whether there is an alternate opportunity with potential upside that can compensate the drawdown in the stocks available in the existing portfolio.

One also needs to see “what is the further downside in these stocks and what is the probability that when market sentiment turns around, these stocks would perform better than the available alternatives,” Porinju said.

ETMarkets.com contacted Porinju for further comments on the subject, but he refused, saying the letter was self-explanatory.

He insisted that reports suggesting that his PMS was being unable to meet redemption demand were incorrect.

A tough economic and regulatory environment in India has had its biggest victims in India’s smallcap stocks. Many potential largecaps may also die small, as fundamentals of many of them, deemed fragile, are on a downward spiral. The smallcaps enjoyed a dream run from 2013 through 2017.

Porinju said even though he was cognisant of the many challenges that the economy was facing, he underestimated the extent of the “first and second order consequences” of some of them.

About 1,350 stocks on BSE have eroded over 50 per cent of investor wealth since January 1, 2018. Some 122 stocks have lost 90-99 per cent of value in last 18 months.

A staggering 2,500 stocks – which is 86 per cent of the total 2,900 actively stocks traded on BSE – have failed deliver positive returns since January, 2018.

The selloff has baffled even seasoned investors. Many brokerages have stopped coverage of nearly 335 companies in the smallcap segment in last one year, while fewer analysts are covering another 225 companies.

Last month, smallcap-focused PMSes met with the biggest disappointment, as none of the 16 schemes from a sample of 43 PMSes could create wealth for investors.

A strong mandate for the Modi-led BJP government in the general election, back-to-back policy rate cuts and a fiscally-prudent Union Budget have failed to lift sentiment on the smallcap counter.

Porinju said he expected the elections to be a turning point for equities, but the positives of the continuity at the Centre was lost thanks to the market-unfriendly provisions in the Budget, at least for the near term.

He said a significant recovery in smallcaps looks inevitable, but would not give a time frame. “I have gone wrong many times earlier in this regard,” he said.

The seasoned investor said even as the maiden Budget of Modi 2.0 laid out a long-term vision, some provisions in it have been disappointing for the stock market from a near-term perspective.

“While the monetary impact of these changes is minimal, the message it sends out to the larger investment community is rather regressive,” he said.

Porinju was indirectly referring to the income-tax surcharge in the high income bracket, as well as the proposal to increase minimum public float of listed firms to 35 per cent from 25 per cent.
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