The Nifty Midcap 100 and Nifty Smallcap 100 indices continued their downward trend, extending losses in Wednesday's trading session. The indices declined up to 2.5 percent in today's trading session. The indices witnessed cuts of over 2 percent on January 21, marking sustained selling pressure this month.
On Tuesday, the benchmark BSE Sensex nosedived 1,235 points, closing at its lowest level in over seven months. During intraday trading, the Sensex hit 75,641.87, a decline of 1,431.57 points or 1.85 per cent. Similarly, the NSE Nifty plunged 320.10 points or 1.37 percent to settle at 23,024.65, levels last seen on June 6, 2024. The Nifty has dropped nearly 12 percent from its September 2024 highs.
Broader Market Rout
The Nifty Smallcap 100 index has been the worst hit, crashing 9.2 percent so far in January 2025. Analysts say high valuations, consistent foreign institutional investor (FII) selling, and profit-taking have weighed heavily on sentiment.
In just two trading sessions from January 21-22, the index declined by 5 percent. Key laggards included Aditya Birla Real Estate, Indiamart Intermesh, and Kaynes Technology, which fell up to 9 percent on Wednesday.
The Nifty Midcap 100 index has shed 7.7 percent this month. Persistent Systems, Prestige Estates, and Oberoi Realty were among the biggest losers from the midcap segment, dropping up to 8 percent.
Factors Fueling the Selloff
The recent correction in small and midcap indices, with a sharp 5 percent fall over two sessions, is largely driven by a mix of valuation concerns, macroeconomic pressures, and profit-booking by investors.
Sonam Srivastava- Founder and Fund Manager at Wright Research PMS said rising global uncertainty has amplified the selling pressure. Concerns over elevated crude oil prices, geopolitical tensions, and a potential slowdown in global demand have kept investor sentiment cautious.
"Domestically, the RBI's hawkish stance, citing inflationary risks, has added to market unease. Rising bond yields and tightening liquidity have also played a role, increasing the relative attractiveness of debt investments over equities," she noted.
After a strong rally throughout 2023, many small and midcap stocks reached valuations that were above historical averages. "This created a natural expectation of a correction, especially in the absence of fresh triggers to justify these elevated levels," Srivastava further said adding that profit-booking by retail and institutional investors, who benefited from the earlier rally, has further accelerated the decline. This was evident as the broader markets underperformed while large-cap indices remained relatively resilient.
Vivek Sharma, Investment Head at Estee Advisors noted one of the primary concerns for investors has been overvaluation. Mid-cap and small-cap stocks were trading significantly above their historical median valuations. The subsequent correction has had a cascading effect where the market fall validate investor concerns, which prompts further selling, leading to further fall in the market.
Looking Ahead
With Nifty and Sensex hitting multi-month lows and broader indices underperforming, investors are advised to tread cautiously. Analysts recommend focusing on quality stocks with strong fundamentals, given the current market uncertainty.
"These corrections are often healthy in the long term, as they bring valuations to more sustainable levels, creating opportunities for long-term investors to re-enter quality stocks at reasonable prices. For small and midcap investors, the focus should remain on fundamentally strong companies with growth visibility, avoiding speculative plays during volatile phases," Sonam said.
"Corrections like these should be seen as opportunities to invest further. Data from AMFI indicates that retail investors are now viewing market corrections as entry points rather than a signal to run away. My recommendation to investors is to focus on the long-term potential of your investments and view corrections as opportunities for wealth creation," Sharma added.
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.
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