It is just the beginning: Analysts on sharp correction in mid-and small-cap stocks

Stock market today: The mid-and small-cap stocks continued to face selling pressure for the third straight session on Wednesday, March 13, amid all-around concerns regarding the stretched valuations in the segment. The Nifty Midcap 100 logged its worst intraday fall since January 23, while the Nifty Smallcap 100 also saw its worst day after February 12, 2024.

Nifty Midcap 100 settled with a cut of 4.4 per cent at 45,971.4, while Nifty Smallcap 100 lost over 5 per cent and settled at 14,295.05.

A few days ago, Sebi flagged froth in the broader market. The Sebi chairperson, Madhabi Puri Buch, said that there may be pockets of "irrational exuberance" in the equity market. The statement by the Sebi chief led to investors dumping the second-rung stocks that have seen a meteoric rise in the past one year. 

As per Zee Business research desk, both the Nifty Midcap 100 and Nifty Smallcap 100 logged their all-time highs of 49,780.65 and 15,489.5, respectively, on February 8 and since then have lost 7.2 per cent and 14 per cent, respectively.

How do analysts view the correction?

The broader market correction was long warranted after high exuberance in the space, said Ambareesh Baliga, an independent market analyst. Baliga told Zee Business that the current correction could deepen and that it is just the start. The analyst opined there could be some bounce back, but the correction should go deeper since flows to micro, small, and mid-caps are getting controlled due to regulatory glare.

G Chokkalingam, Founder, of Equinomics Research, says there is a further correction in the offing to the tune of 5 per cent each in the small-cap and midcap indices. 

“While Sensex and Nifty may rebound soon, small and midcap indices may weaken another 5 per cent each. A solid growth story and severe underperformance of large caps in the last three years about small and mid-caps will help the Sensex and Nifty rebound quickly. However, there are still a huge number of small and mid-cap stocks with elevated valuations. Hence, small and midcap indices should possibly correct at least another 5 per cent each,” said the expert.

Recently, small and midcap stocks faced a bumpy ride due to Sebi's vigorous crackdown on over-speculation, prioritising the safeguarding of market participants' interests. Both indices slipped below their recent consolidation levels, sparking increased bearishness among market participants, Rupak De, Senior Technical Analyst at LKP Securities, told Zeebiz.com.

"Moreover, they've dipped below crucial short-term moving averages, further dimming the overall sentiment. While buying on substantial dips may offer opportunities, it's essential to be highly selective and focus on specific stocks within the broader market landscape,” De added.