Small, Midcap Indices Plunge 3.5% Amid Heavy Sell-Off: Analysts Warn of Further Correction

Nifty Midcap 100 and Smallcap 100 Underperform as Valuation Concerns Rise

The Nifty Midcap 100 and Nifty Smallcap 100 indices witnessed a sharp decline of up to 3.5% on Tuesday, continuing their year-to-date (YTD) downtrend of 11.29% and 14.6%, respectively. These indices have significantly underperformed the benchmark Nifty 50, which has fallen only 2.91% YTD.

Highlight:

• Smallcap and midcap indices dropped up to 3.5% amid persistent selling pressure.
• Nifty Midcap 100 is down 11.29% YTD, while Nifty Smallcap 100 has lost 14.6%.
• High valuations, weak corporate earnings, and global trade uncertainty continue to weigh on sentiment.
• Top losing stocks in the smallcap and midcap space plunged up to 12%.
• Analysts predict further corrections of up to 30% in stocks with excessive valuations.

Top Losers in Small, Midcap Space

Smallcap Stocks:

• HBL Engineering, Swan Energy, and Amber Enterprises declined up to 12%.

Midcap Stocks:

• PB Fintech, Fertilizers and Chemicals Travancore Ltd, Escorts Kubota, and Oberoi Realty lost up to 8%.

Analysts Warn: ‘Don’t Buy Yet, More Fall Likely’

Market experts remain cautious about small and midcap stocks, warning that the sell-off is unlikely to end soon due to stretched valuations and weak earnings growth.

• Sanjeev Hota, Head of Research at Mirae Asset Sharekhan, said:
  “A deeper correction is likely in stocks where valuations are still excessive and not backed by earnings growth. In the last correction cycle of 2018-19, smallcap indices declined 29%. A similar trend could play out this time.”

• Hota further added:
  “Global trade tensions, concerns over US tariffs under President Donald Trump, a weakening rupee, and subdued domestic macroeconomic conditions are putting additional pressure on these stocks. Once earnings recover, quality mid and smallcap stocks may see a turnaround.”

Technical Indicators: Downtrend Continues

• Ruchit Jain, VP at Motilal Oswal Financial Services, stated:
  “Midcap and smallcap indices have been in a downtrend, forming lower highs and lower lows. Until we see signs of a reversal, the corrective phase is likely to persist in the short term.”

• Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, emphasized:
  “FIIs have aggressively sold largecaps, making their valuations reasonable. Meanwhile, mid and smallcap valuations remain excessive. FIIs will return as buyers in India, but only when the dollar index weakens.”

Investment Strategy: Focus on Largecaps

• Vijayakumar recommends:
  “Investors should focus on quality largecaps in banking, IT, autos, pharma, and capital goods. FIIs will eventually return to Indian markets, and when they do, largecaps will be their first choice.”

Broader Market Weakness Continues

The benchmark Sensex and Nifty fell over 1%, extending their losing streak for the fifth consecutive session. Markets remain under pressure due to:

• Escalating US trade tensions and Trump’s tariff policies.
• Persistent foreign institutional investor (FII) outflows.
• Disappointing Q3 corporate earnings.

Outlook: Should Investors Buy Now?

With analysts warning of a further 30% correction in overvalued small and midcap stocks, investors are advised to wait for earnings recovery before entering the segment. Meanwhile, long-term investors can accumulate quality largecaps at attractive valuations for potential gains once FIIs return.