Market Weakness Continues as Only 10% of Nifty 500 Stocks Trade Above 200-DMA

The Indian equity markets are witnessing broad-based valuation declines as stocks adjust to a slowdown in earnings growth. According to a recent DSP report, only 10% of Nifty 500 stocks are currently trading above their 200-day moving average (DMA)—a key technical indicator that signals market momentum.

Additionally, 155 stocks have hit new 52-week lows, but historical trends suggest stability typically emerges when over 200 stocks reach this level.

Market Signals from the Report

• Volatility Index (VIX) remains low: Despite a 16% drop in the Nifty 50 index, the low VIX suggests that investor fear hasn’t peaked yet, indicating the market may not have bottomed out.
• Price-to-Book (P/B) Ratio Trends:
  • 33% of stocks in the Nifty MidSmall 400 Index are now trading below a 3x P/B ratio, compared to 25% in September 2024.
  • Large-cap valuations are near historical averages, with the Nifty 50 P/E ratio falling below 20x and P/B ratio at 3.3x (long-term average).
• Market Cap-to-GDP Ratio:
  • Remains slightly above its historical trend, suggesting further corrections might be needed for a stronger investment opportunity.

Small & Midcap Stocks: Still Overvalued?

• SMIDs (Small & Midcaps) remain expensive:

  • Median TTM P/E for SMIDs is at 33x, down from 46x in early 2024, but still above the long-term average of 20x.
  • SMID earnings underperformed large caps for two consecutive quarters due to domestic economic slowdown.
  • Excluding Banking and Financial Services (BFSI), small and midcap earnings contracted YoY—a major reversal from previous years.

• Inflows into Small Caps Could Slow:

  • Mutual Fund flows into small & midcap stocks reached 8.2% of their free float over the last 12 months, fueling excess valuation.
  • Small cap assets held by active equity funds surged 10x since March 2020, compared to a 4x growth in large caps.
  • As returns soften, incremental flows to small caps may decline, reducing valuation froth.

What’s Next for Investors?

1. Wait for Stability: The report advises that further downside risks exist for small & midcaps before they reach a stable investment zone.
2. Adopt a Moderate Investment Stance: Now is not the time to be aggressive—investors should gradually raise equity exposure through:
   • Hybrid funds (Dynamic Asset Allocation, Multi Asset Allocation).
   • Staggered purchases in large caps via SIPs (Systematic Investment Plans).
3. Small & Midcaps Need More Corrections: Given high valuations, investors should wait for further corrections before making major allocations.

Bottom Line

The market correction has improved large-cap valuations, but small & midcaps remain overvalued. With the VIX still low, further market corrections are likely before a recovery. Investors should stay cautious, focus on large caps, and use staggered investments rather than making aggressive moves into small caps.