Mid, small-cap selloff: Half lose 1-year gains; 3-year returns hit for 25% stocks

markets

The recent selloff in the mid and small-cap stocks has eroded nearly a year’s gains for half of the BSE MidCap and SmallCap Index constituents, with a quarter of these stocks losing their three-year returns as well.

Currently, 100 stocks in the BSE SmallCap and 15 in the BSE MidCap index are delivering single-digit returns over both one-year and three-year periods even as several stocks have breached key technical support levels.

Incidentally, the BSE MidCap and BSE SmallCap indices have declined over 20 percent and 23 percent, respectively, since touching their highs in September last year. Both indices are now trading below their 20-day and 50-day EMAs, forming a pattern of lower highs and lower lows, signalling persistent weakness.

Further, the Relative Strength Index (RSI) for many stocks has dropped below 40, indicating heightened selling pressure and weak buying interest, while options data shows significant call writing at higher levels, reinforcing resistance zones.

This sharp correction has led to notable valuation adjustments, potentially offering attractive entry points for investors. The BSE MidCap index currently trades at a one-year forward PE of 24.24x, compared to its 10-year average of 27.94x, while the BSE SmallCap index trades at 20.52x against its 10-year average of 21.44x.

The Indian markets have witnessed a steep decline since late September, driven by sustained foreign investor selling. The FII outflows are primarily on account of elevated valuations, slowing economy, weaker corporate earnings, and global tariff tensions following the election of US President Donald Trump.

Narinder Wadhwa, Managing Director & CEO of SKI Capital Services, stated that these corrections have brought valuations closer to their historical averages, potentially creating value opportunities for investors.

However, experts advise caution as a section of analysts believe that mid and small-cap stocks still appear relatively expensive compared to large caps. While the recent decline has adjusted valuations, investors should conduct thorough research and assess their risk tolerance before making investment decisions, they say.

Mandar Bhojane, Equity Research Analyst at Choice Broking, believes that a trend reversal will require a solid base formation and a breakout above key resistance levels with strong volume confirmation. Until then, traders should remain cautious and avoid bottom-fishing in weaker stocks, as short-term pullbacks may encounter significant resistance, limiting any meaningful upside in the near term.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.