Overheated SMIDs melting now
Nifty Midcap-100, Nifty Smallcap-100 corrected 7%, 9% respectively from the record highs; Pressure turns intensive after Sebi chief flags froth in small-&mid-cap stocks
Hyderabad: After rising 66 per cent in the past one year, Nifty Midcap-100 index corrected 3,432 points or 6.95 per cent to 45,919.90 points on last Friday (March 22) from record peak of 49,352.05 points on February 7, 2024. Registering a whopping 78.22 per cent rise in the past one year, Nifty Small-cap 100 index reached its record peak of 16,263 on January 29, 2024, and corrected 8.7 per cent so far this year as it hovering at 15,056.75 points.
“Small-caps and mid-cap stocks (SMIDs) turned sluggish and hovering in consolidation phase on profit booking amid rising concerns over stretching valuations,” Dhirender Singh Bisht, associate vice-president (technical research) at SMC Global Securities Ltd, told Bizz Buzz.
Defying the global challenges, the domestic capital market has been growing on strong domestic fundamentals and significant rally in small-caps and mid-caps (SMIDs) stocks, as the SMID cohort returned over 60 per cent during the past one year as against 23 per cent by BSE Sensex. The major trigger was aggregate foreign holdings in the mid-cap stocks rose to 17 per cent as of December 2023, from 14 per cent a year earlier, observes ICICI Securities in its latest report.
Further, the market breadth turned negative from last week onwards as the advance-decline ratio fell to 0.16:1, the worst since October 23, 2023.
Nifty Midcap-100 down 2.1 per cent, while the Nifty Smallcap-100 shredded five per cent in the last five days. Excessive liquidity drove up mid-cap and small-cap stock prices, often exceeding their justified values based on earnings. Fund managers were very upbeat on these segments and it further led to inflating valuations.
As far as fundamentals are concerned, India commands strong position globally as it’s world’s fastest growing economy. With $617 billion, as of mid-February 2024, India holds the fourth largest FX reserves in the world.
“While expensive Indian equity market valuation could create FII flow uncertainty, we believe India’s growth resilience, along with the forthcoming bond index inclusion (scheduled as of June 2024 onward and could lead to $30 billion of flow/60 per cent of the FY25 current account balance), will keep capital account in a surplus,” says UBS in its report.
The small-cap index was down more than three per cent in single session last week, while mid-cap index was down more than two per cent. The SME IPO index is down more than four per cent. Other pockets of the market are also very weak with the PSU index down more than four per cent.
Market breadth is extremely negative with 83 per cent of the listed stocks declining. More than 700 stocks have hit the lower circuit indicating the meltdown in the small-cap stocks.
But it has taken the strong message from the regulator Sebi to trigger a correction in the Nifty Small-cap index by 10 per cent from the February 8 peak.
As many as 396 stocks were in the lower circuit indicating that there is more pain to come in this segment. Actions from mutual funds (MFs) also indicate the excessive valuations in the broader market. Few MFs already stopped lump sum investments in their mid- and small-cap schemes. More are likely to follow. The net impact of this shift would be more money flowing into large caps.
