The small and midcap indices tumbled up to 3.5 percent on Tuesday as investors continued to offload shares amid concerns over high valuations, weak corporate earnings and global trade uncertainty.
The Nifty Midcap 100 and Nifty Smallcap 100 indices have declined 11.29 percent and 14.6 percent, respectively, on a year-to-date (YTD) basis, significantly underperforming the benchmark Nifty 50, which is down only 2.91 percent in the same period.
Market analysts believe that while foreign institutional investors (FIIs) have been actively selling large-cap stocks, bringing their valuations to reasonable levels, mid and smallcap stocks still appear overvalued.
Top Losers in Small, Midcap Space
Among the worst performers in the smallcap segment during Tuesday’s trading session were HBL Engineering, Swan Energy, and Amber Enterprises, which plunged up to 12 percent. In the midcap basket, PB Fintech, Fertilizers and Chemicals Travancore Ltd, Escorts Kubota, and Oberoi Realty were among the top losers, shedding up to 8 percent.
Sanjeev Hota, Head of Research at Mirae Asset Sharekhan, noted that the ongoing sell-off in mid and smallcap stocks is not expected to abate anytime soon. "A deeper correction is likely in stocks where valuations are still excessive and not backed by earnings growth. In the last correction cycle of 2018-19, smallcap indices declined 29 percent, and we could see a similar trend this time," he said.
Hota added that small and midcap stocks are primarily driven by earnings growth, which is currently absent. "Additional pressure is coming from global trade tensions, concerns over US tariffs under US President Donald Trump, a weakening rupee and subdued domestic macroeconomic conditions. Once earnings recover, quality mid and smallcap stocks may see a turnaround."
"For stocks where valuations remain high and are not supported by earnings growth, we could see further corrections of up to 30 percent from current levels," he said.
Echoing similar sentiments, Ruchit Jain, Vice President at Motilal Oswal Financial Services, pointed out that the midcap and smallcap indices have been in a downtrend, forming lower highs and lower lows. "Until there are signs of a reversal, the corrective phase is likely to persist in the short term," he said.
Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, added "the relentless selling by FIIs in largecaps has made their valuations fair while the valuations of mid and smallcaps continue to be excessive. FIIs will certainly turn buyers in India; but that will happen only when the dollar index turns weak. We know that it will happen, but don’t know when. What investors have to do now is to buy quality largecaps in banking, IT, autos, pharma and capital goods and wait patiently. When FIIs turn buyers in India, which is inevitable, they will be buying the largecaps which they are selling now. For patient investors, this is a good opportunity."
Meanwhile, the benchmark Sensex and Nifty declined over 1 percent, extending their losing streak for the fifth consecutive session. Escalating US trade tensions, persistent foreign fund outflows, and disappointing corporate earnings weighed on investor sentiment, dragging markets lower.
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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