Since June 2015, we have been voicing our concern on market valuations on mid and small cap space. Irrespective of events like Brexit, demonetization or outcome of US elections, market momentum in mid and small cap space has been undeterred.
Since May 2014 with the outcome of Indian elections and NDA government coming in majority, we believe market has rallied on a complete hope based story where the gap between valuations and fundamentals has widened significantly. Focus has shifted from strong conventional businesses to emerging and turnaround stories where we believe the premiums paid are very high.
It is usually in a market like this when behavioural biases overpower an investor’s cognitive decision making ability where greed takes a precedence to rational thinking.