Smallcap, midcap indices crash up to 2.5% as selling pressure weighs

Experts have long warned about lofty valuations in the midcap and smallcap segments.

The broader markets continued to see selling pressure in trade on March 3, as midcap and smallcap stocks traded in the deep red with investors continuing to offload their holdings en masse.

The Nifty Smallcap 100 index cracked a whopping 2.4 percent, sinking to lows, while the Nifty Midcap 100 index crashed two percent as well, by around 11.30 am.

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Experts have long warned about stretched valuations in the midcap and smallcap segments, but retail investors largely ignored the concerns. With froth building up in the market, a correction was inevitable, analysts said. ICICI Pru AMC’s CIO S Naren warned against valuations in mid- and small-cap, which sparked a debate in the industry.

Amish Shah, Head of India Research at Bank of America Securities, remains wary of the broader market, arguing that mid and small-cap stocks remain overvalued despite recent corrections. He anticipates further declines in this segment, with returns potentially lagging or turning negative compared to large-cap stocks.

"We expect the Indian market to see a diverse performance across caps, sectors and stocks in the next few months. Large-cap indices and stocks may be range-bound, while several midcap, small-cap and ‘narrative’ stocks may see a sharper correction," analysts at Kotak Institutional Equities noted.

Looking ahead, the brokerage also expects the Street to adjust its fair valuation multiples for stocks and earnings assumptions of companies in light of the recent market correction. "This will be particularly evident in mid-cap, small-cap, and ‘narrative’ stocks, where valuations had largely become detached from reality," KIE said.

Also Read | Indian equities now trade below long-term valuations, but are they cheap? No, say analysts

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