Data suggest that the S&P BSE Smallcap index has plunged by about 39 percent from its 52-week high while the S&P BSE Midcap index is down by a little over 20 percent from its peak, as of data collated on August 7.
Small and midcap stocks are in a bear market, data suggests. To add to the worries, it shows S&P BSE Sensex is almost halfway there.
According to the data collated on August 7, the S&P BSE Smallcap index has fallen about 39 percent from its 52-week high, while the S&P BSE Midcap index is down a little over 20 percent from its peak.
The S&P BSE Sensex is approximately halfway there as in the same period, it is down about 9 percent from its 52-week high of 40,312.
A bear market is a condition in which securities/stock prices fall 20 percent from their recent peak amid widespread pessimism or fear in the market. A situation analysts say we are already deeply entrenched in.
Smallcap & midcap stocks continued to be under pressure even when benchmark indices were hitting record highs two months ago. It was about time, benchmark indices would catch up to the broader market, largely weighed down by expensive valuations, budget proposals, selling by foreign investors, muted results, and trade war concerns.
"The broader market is in a bear grip it is just that few heavyweights/blue-chips and Index that are performing,” Mustafa Nadeem, CEO, Epic Research told Moneycontrol.
“We have seen index management and concentrated stocks that are performing well but Auto, Smallcap, Midcap, and other few spaces are not doing that well. Smallcap and Midcap have been in a downtrend and it's been more than a year,” he said.
The S&P BSE Smallcap index constitutes of 747 stocks, of which, 653 are currently trading more than 20 percent below their 52-week highs. These include Cox & Kings, Eros International, DHFL, Ashapura Intimates, Punj Lloyd, Reliance Naval, Kwality, Repro India, Granules India, among others.
In the S&P BSE 500 index, as many as 351 companies out of 500 have dropped more than 20 percent from their respective peaks. These include Reliance Communications, Reliance Capital, Shankara Building, HEG, Jaiprakash Associates, YES Bank, Indiabulls Ventures, Graphite India, CARE Ratings, among others.
Here is a list of top 20 stocks (out of 653) which are down more than 20 percent from their respective peak:
Smallcap & Midcap stocks have seen a consistent decline in the last 18 months. Most of the carnage can be attributed to muted earnings of most of these companies which are trading at higher multiples.
The Indian economy has also slowed down which usually does not auger well for smallcap & midcap companies, suggest experts. From a portfolio perspective, the return potential would be substantial for someone who decides to stick with smallcaps, although they must take the risk factor into account.
“The underperformance amongst broader markets is mainly a result of weak domestic sentiments and muted earnings announcements for Q1FY20,” Ajit Mishra, Vice President (Research), Religare Broking told Moneycontrol. Investing prudently in a phased manner is the key if one wishes to take advantage of correction, he added.
If investors have a moderate risk profile, they should stay with largecaps or select midcap stocks, from a portfolio standpoint. This is an important time to review asset allocation, ensure alignment with risk appetite, and build a portfolio of non-correlated investment streams that position portfolios for multiple outcomes, suggest experts.
“Small and mid-cap companies have been pummeled for 18 months, but we would still be unable to say that valuations appear compelling. Our bottom-up computation puts the larger CNX 500 valuation at 25.6 times trailing earnings. Forward earnings will need to be ratcheted down yet again in the fourth quarter,” Sunil Sharma, Chief Investment Officer, Sanctum Wealth Management said.
“From a cap perspective, mid and small continue to get hammered. The recent calls we are witnessing to buy mid and small have been loud, and wrong. Midcap and smallcap stocks have underperformed even in the past month. There is no particular necessity to catch that falling knife early. We remain comfortable with quality largecaps,” he said.
He further added that the biggest mistake investors make at these times is to shed quality companies. We end by pointing out that investment behaviour is likely to be far more critical than investment performance in the coming days.
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