Mid, small-cap stocks bear brunt of market correction, decline 10% in April

The latest correction seen in the markets has hit the mid- and small-cap stocks most. While the benchmark indices have come off around 5 per cent from their record highs in April, the mid- and small-cap indices have declined by about 10 per cent during the same period. 

The Nifty on Thursday ended at 11,257, 4.5 per cent off its all-time high of 11,787 on April 16. The Nifty Midcap 100 ended at 16,673 and the Nifty Smallcap 100 closed at 6,103.80 — down 8.6 per cent and 10 per cent, resp­ectively, for the same period.

The latest spell of underperformance in the broader market has dashed hopes of investors who were betting on this space following huge declines in 2018.

Experts say fears surrounding corporate defaults, governance issues, and an inconsistent growth profile, have impacted the broader market stocks. 

While valuations have turned attractive for many companies in this space, analysts advise investors to focus on good-quality names. 

“This is a good time to enter into the mid-cap space, especially the high-quality names with strong returns on equity. Mid-caps that have negligible amount of leverage, clean books, and less political linkage could be good investments with a three-year horizon,” said Siddhartha Rastogi, managing director, Ambit Asset Management.

Market experts said that in a country like India where there are several companies, entre­preneurship is highly prevalent, and regulations are in place, investors shouldn’t completely ignore mid- and small-caps even if they carry higher risks in market downturns. 

“Investors can hope to gain alpha only in small- and mid-caps where enough due diligence has been done, and reasonable care has been taken to enter and book profits at (or near) the right times. In the second half of the year, we may see small- and mid-caps starting to perform and partially reversing the underperformance of 2018,” said Deepak Jasani, head (retail research), HDFC Securities.

Jasani added that a common theme among firms that have seen share prices drop sharply was bad promoter behaviour. “High share pledging, over-leverage, improper capital allocation, and fund diversion were some of the key concerns,” he said.

Experts noted that election results will show some direction on whether further buying will happen. 

“If results throw up a stable government, a lot of people waiting on the sidelines could invest,” said Ambareesh Baliga, an independent market analyst.