Smallcap, Midcap Indices Plunge Over 2% as Market Selloff Deepens

Market Turmoil Continues: ₹18 Lakh Crore Wiped Out Since Correction Began

The Indian stock market witnessed another sharp decline on February 28, with smallcap and midcap indices tumbling over 2% in early trade. The sustained selloff, driven by geopolitical concerns and valuation worries, has now pushed both indices into bear territory.

• Nifty Smallcap 100 has declined over 21% from its peak, wiping out ₹5.25 lakh crore in market capitalization.
• Nifty Midcap 100 has plunged 24.5%, leading to an erosion of ₹13.35 lakh crore in market value.
• The broader market downturn has resulted in an ₹18.60 lakh crore wealth erosion.
• Nifty 50 has declined 15% from its all-time high, losing ₹31.94 lakh crore in investor wealth.

Midcaps, Smallcaps Enter Bear Market Amid Valuation Concerns

The sustained downturn in midcap and smallcap stocks has been attributed to concerns over overvaluation and retail-driven speculation. Since their peaks in September 2024, these indices have witnessed an extended correction, marking one of the steepest declines in recent years.

As of 11:30 AM on February 28, Nifty 50 was trading 1.19% lower at 22,250, extending its losing streak to seven consecutive sessions. This also marks the longest downward trend in nearly 30 years, shaking investor confidence across broader markets.

“The correction is easing Nifty 50’s valuation closer to its 10-year mean of 20x one-year forward price-to-earnings (P/E) ratio, approaching -1 standard deviation (SD),” analysts noted.

Market Veterans Warned of Overheated Smallcap, Midcap Rally

The recent crash aligns with warnings from seasoned investors and regulators, who had cautioned against unsustainable valuations in smallcap and midcap segments.

• S. Naren, CIO at ICICI Prudential AMC, had repeatedly warned investors about potential overvaluation risks in these segments.
• SEBI Chairperson Madhabi Buch had urged mutual fund houses in 2023 to impose stricter checks and balances to prevent a speculative bubble.
• Prashant Jain, CIO at 3P Investment Managers, described the midcap underperformance as “unsurprising”, citing the lack of room for multiple re-ratings.
• Sanjeev Prasad, MD at Kotak Institutional Equities, criticized the “midcap madness”, warning about excessive speculation in the broader market.

Retail Frenzy Fuels Volatility in Smallcaps and Midcaps

Despite warnings, retail investors continued to pour money into smallcap and midcap mutual funds, further inflating valuations.

“During a bull run, midcaps and smallcaps may outperform the broader market by 6-8% annually over two to three years. However, when corrections happen, they are often sharper than expected,” noted Sameer Arora, Founder and Fund Manager at Helios Capital.

Data suggests that while the past three years saw strong returns, historical trends indicate that over a longer horizon (7+ years), average returns stabilize:

• Nifty 50: 13-14% annual returns
• Nifty 500: 15-16% annual returns

What’s Next for Smallcap and Midcap Stocks?

With market sentiment weakening, analysts expect further downside unless valuations stabilize. The recent correction could set the stage for healthier long-term growth, bringing stock prices closer to intrinsic value.

“When markets cool off, end-users and institutional investors return, strengthening long-term fundamentals,” analysts observed.

Key Takeaways for Investors:

1. Midcap and Smallcap indices have officially entered bear market territory, falling 21% and 24.5%, respectively.
2. Nifty 50 has lost 15% from its peak, marking its longest losing streak in three decades.
3. ₹18.6 lakh crore wiped out from broader markets, sparking investor concerns.
4. SEBI and market veterans had warned about speculative excesses in smallcap and midcap stocks since 2023.
5. Corrections could continue as market valuations readjust, providing better long-term entry points for investors.

As uncertainty looms, market participants will closely monitor global and domestic cues, waiting for signs of stabilization before making fresh investments.