There are signs that 'silly richness' has set in a few of these stocks, expanding the dangers of holding them in the portfolio. In 1996, former US Federal Reserve chairman Alan Greenspan popularized the term "irrational exuberance" to describe a situation in the stock market in which stock prices are so high that they cannot be justified by looking at their fundamentals.
"We see restricted point in attempting to track down central purposes for the lofty expansion in stock costs of a few mid-cap and little cap stocks," the report by experts at Kotak Institutional Values noted. The fundamentals of the majority of businesses have not changed significantly, but for many, they have worsened. Irrational exuberance among investors appears to be the primary driver of the rally, with high return expectations (and purchase decisions) being influenced by the recent high returns.
Think about this: The nifty smallcap index increased by 23% and 35%, respectively, over the previous three and six months, while the nifty midcap index increased by 20%. Domestic mutual funds' mid- and small-cap schemes have received approximately Rs 21,500 crore in inflows over the past four months, while large-cap and flexi-cap schemes have received approximately Rs 6,000 crore in outflows. Furthermore, over the most recent one year, 64 lakh new MF folios were opened in mid-cap and little cap conspires, an increment of 34%, the report noted.
"We don't see numerous essential explanations behind the fleeting ascent in the stock costs of numerous mid-cap and little cap stocks in the beyond couple of months. The majority of industries' fundamentals have not changed significantly, the report stated.
Kotak Institutional Equities, among others, also issued a cautionary note to investors regarding stocks that fall under the dubious category of "turnaround" stories. Calling these stocks 'with no set of experiences or potentially future', that's what it noticed "large numbers of these organizations have had to deal with serious functional and monetary difficulties (counting chapter 11) in the new past. ( However, the market has high hopes for these businesses' future success. We are don't know of the premise of the market's certainty."