October's 7% cut in Midcap index was steepest in four years: Experts weigh on what next

Experts observe that typically 12-14 percent corrections in mid- and small-cap segments support a healthy market reset, setting up the next growth phase.

The BSE Mid and Smallcap indices - the broader market gauge - experienced steep corrections in October, declining over 7% and 4% respectively, to mark the first monthly loss for the space in seven and five months, data shows.

For the BSE Midcap index, this was the steepest monthly fall in four years, while the BSE Smallcap index fell most in two years this October.

The Mid and smallcap space has shown remarkable outperformance over the past year though the quantum of correction has also been significantly higher. While large-cap stocks have dropped by 8-9 percent, select mid and smallcap names have seen more substantial corrections of 20-30 percent.

The recent market correction comes amid over $11 billion in foreign investor outflows in 2024, driven by geopolitical tensions and uncertainty surrounding the upcoming U.S. presidential election. Additionally, weak September-quarter earnings and the Reserve Bank of India’s stance of not rushing with a rate cut may have further dampened investor sentiment.

Experts observe that typically, a 12-14 percent correction in mid and smallcap segment supports a healthy market reset, setting up the next growth phase.

Deepak Jasani, Head of Retail Research at HDFC Securities is of the view that while the mid and smallcap spaces have enjoyed a bull run over the past year, recent corrections remain modest and valuations are still high, relative to long-term averages. He cautions against indiscriminate buying at these elevated levels, emphasizing the need for earnings support to sustain any forthcoming pullbacks.

Jasani maintains a positive medium-term outlook for these segments, as they are key areas for generating alpha. He adds that once correction occurs or earnings growth accelerates in this space, renewed bullishness and buying interests are likely to follow.

Currently, the BSE Midcap and Smallcap indices have one-year forward P/E ratios of 35.3 and 26.8, respectively, compared to their 10-year averages of 29.3 and 23.7, respectively.

Ritesh Jain, founder of Pinetree Macro, highlighted signs of an economic slowdown in India, evident from the fiscal deficit data for the first half of the financial year, reflecting reduced government spending. This slowdown has impacted the broader market, particularly mid- and small-cap stocks, which had surged due to excess liquidity. Jain views the current correction as a positive development for the long-term sustainability of India's bull market.

Looking ahead, Jain advocates a selective approach in the broader market segment, but remains confident that this space, rather than the largecaps, hold key to portfolio growth.

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