For first time in 10 years, broader indices fare better than Nifty 50 in market correction: MOFSL

As Dalal Street benchmarks progress towards their all-time highs of late September, with the Nifty50 still more than 1,600 points, or 6.2 per cent, below the mark, broader indices including Nifty Midcap 100 and Nifty Smallcap 100 indices have registered smaller falls than the headline index during a market correction phase. Historically, in case of a correction—a slide of 10 per cent or more from its recent peak—in the Nifty50 index, the broader indices have registered corrections to the tune of 2-4 times, with the exception of 2024, according to brokerage Motilal Oswal Financial Services Ltd (MOFSL). 

According to the brokerage, as of November-end, while Nifty stood 8.0 per cent below its all-time high on a closing basis, the midcap and smallcap indices were 7 per cent and 5 per cent below their highs. In other words, it is for the first time in 10 years that midcap and smallcap gauges have fallen less than their largecap counterparts during a correction in the Nifty index. Technically, a correction is defined as a fall of at least 10 per cent from the recent peak. 

What has helped midcap and smallcap indices stage relative outperformance to Nifty50?

A relentless net selling by foreign institutional investors (FIIs) has led to a significant decline in largecaps, while strong retail and domestic institutional investor (DII) flows have led to midcaps and smallcaps outperforming by a wide margin during the recent market correction, according to Motilal Oswal Financial Services. 

Here's a comparison of moves in the Nifty 100, the Nifty Midcap 100 and the Nifty Smallcap 100 in comparison to technical corrections in the Nifty50 in the past 10 years, as highlighted by MOFSL: 

DII vs FII divergence hits multi-year low

In the past 10 years, there has been a significant divergence in foreign institutional investors' and domestic institutional investors' net flows. 

"Relentless FII selling and DII buying have led to a significant shift in ownership in the Indian equity market... FII/DII ownership, as a proportion of free float, is down 950b/up 1,330bp since Dec’14 to 36.5 per cent/34.8 per cent," according to the brokerage. 

Take a look at a gradual convergence of FII vs DII ownership 

Largecap contribution to market capitalisation hits all-time low

The sharp rise in midcap and smallcap valuations in the past 10 years has led to a significant decline in the market capitalisation contribution of the largecap segment, according to the brokerage. 

The market cap contribution of largecaps is down 1,500 basis points from March 2020 highs to 60.4 per cent in November 2024, while that for midcaps and smallcaps stocks has risen to all-time highs of 19.1 per cent and 20.5 per cent, respectively, according to Motilal Oswal Financial Services. 

Rupee more stable than more emerging market peers over the past decade

In the past decade, the rupee has remained more stable than more of its emerging market peers. It remains "one of the most stable currencies in emerging markets", according to MOFSL. 

Additionally, the rupee has continued to be less volatile than other major currencies in 2024 so far. 

Nifty valuation

According to the brokerage, the headline Nifty50 index’s 12-month trailing price-to-earnings ratio, at 23.2 times, stands at a premium of about 3.0 per cent to its long-period average (LPA). At 3.7 times, the 12-month trailing price-to-book-value ratio comes in 18 per cent above its historical average of 3.1 times, according to MOFSL.

On the other hand, the headline index’s 12-month forward price-to-earnings ratio stands at 20.5 times, near its long-period average, and its 12-month forward price-to-book value ratio at 3.3 per cent, marking a 16 per cent premium to the its historical average of 2.8 times.

Meanwhile, India’s mcap-to-GDP ratio has moderated to 138 per cent from an all-time high of 146 per cent recorded in September 2024, though above its long-term average of around 85 per cent, according to the brokerage. 

“In midcaps and smallcaps, the market cap-to-GDP ratios continue to trade at historical highs, with all smallcaps now surpassing midcaps,” MOFSL added.