The broader markets staged a reversal on the bourses on February 19, after settling in the red in the past eight of nine sessions. The gains were seen largely in the railway, defence and public sector undertaking stocks, that have borne the brunt of investor selling.
At day's close, the Nifty Midcap 100 was higher by 1.56 percent, while the Nifty Smallcap 100 gained over 2 percent, their biggest single-day jump since January 31. In comparison, the headline index Nifty 50 closed marginally lower at 22,933.
However, despite the minor uptick seen, experts warn against bottom-fishing in the SMIDs segment, as valuations still remain high.
So far this year, the Nifty Smallcap 100 index has corrected 17.58 percent, while the midcap index has cracked 11.82 percent during the same time.
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.
Also Read | Market to remain directionless for next few months, warns Kotak Institutional Equities
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.
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