Seven in 10 mid- and small-cap stocks overvalued; pace of rapid fall over, says Prashant Jain

Seven in 10 mid- and small-cap stocks overvalued; pace of rapid fall over, says Prashant Jain

The correction in small- and mid-cap stocks (Smids) is far from over, with seven out of 10 still appearing overvalued, according to veteran investor Prashant Jain. While the rapid pace of decline may have eased, he expects an extended period of underperformance in this space.

“I would still say seven or eight out of 10 small- and mid-cap stocks appear to be overvalued,” Jain said in an exclusive interview with N Mahalakshmi on The Wealth Formula. You can listen to the full interview HERE.

While the steep selloff in recent months may have taken some froth off the market, he cautioned that valuations remain stretched. “Maybe you will fall an equal amount over the next one or two years,” he added, emphasising that the correction may now take the form of a slower but prolonged decline.

Jain noted that after sharp declines of 30-50%, many sellers may step back, leading to a temporary stabilisation. “It’s just a gut feel that after a period of rapid fall, things can bounce back a little. They can be range-bound. And then again, as earnings come in, as people get emotionally adjusted to lower prices, potential buyers may re-evaluate and say, ‘Look, even today it looks expensive,’” he said. Meanwhile, sellers who had earlier held on might reconsider their stance, further dragging valuations lower.

On large caps, Jain expects them to remain range-bound for now. “It’s very hard to call markets in the near term, but I think you are essentially in a range-bound Nifty kind of market,” he said, adding that over time, equities should move higher in line with economic and corporate earnings growth.

For Smids, however, he remains cautious as a vast number of stocks in the category were driven by “narratives” around themes that were seen as growth areas. Thes included themes in the manufacturing space like Make in India,  China Plus One, renewables, EVs defence, railways and several others. “We are coming to the end of the narrative-driven phase in the market,” Jain said, emphasising that stock selection will now be far more critical. “You will see wider dispersion in stock price movements across sectors and even in companies within the same sector,” he said. He also cautioned that once a sector experiences significant valuation expansion over several years, a reversal in momentum is unlikely to correct quickly.