Recently we have seen the Nifty Midcap 100 and the Nifty Smallcap 250 shed almost 5% of their value in the last 5 days. This came on the back of an article where the SEBI Chairperson flagged a bubble in the Midcap and Smallcap space. This led to sell-offs and market corrections. But is that the end?
The midcap and small-cap space was already in an overvalued territory so much so that people started ignoring the real value of the stock. Economists term this as Greater Fool Theory where essentially the buyer thinks that there is a bigger fool in the market who will give a higher price.
SEBI had also requested the mutual fund houses to conduct a stress test, basically how long it will take the fund house to liquidate 25% and 50% of their portfolio. It doesn’t take much for a liquidity crisis to end up in a solvency crisis where everyone is scampering. The results can be found here Stress Test.
Interesting to note that is the recent concern of RBI regarding easy access to unsecured debt (where RBI increased the risk weightage for unsecured loans in Nov 2023) somehow ties up with the SEBI’s “frothy” statement. RBI has been on the rampage right from imposing bans to Bajaj- Finance- RBL cobranded card, tightening norms around home load (Home Loan crackdown) to banning Paytm Payment Bank. Not to mention the market manipulation being done by JM Financials (JM Financials).
Are investors overleveraged where they are taking up debt and directing the funds to markets so that they don’t miss out on the rally?
It looks like the RBI and SEBI are making a conscious effort to protect the Aam Aadmi (no political connect) from losing their hard-earned money. This is not the first time we are witnessing a bubble but will this lead to another depression?
The Enigmatic Pen 