Market crash: Over two-thirds of mid, small-cap stocks in bear territory

The fall from peak levels in these segments, according to Gaurang Shah, senior vice-president at Geojit Financial Services has also been account of earnings disappointment besides amid high valuations

Over two-thirds of stocks within the mid and small-cap basket of the National Stock Exchange (NSE) have fallen into bear market territory amid a sustained decline in the equity markets. In other words, they have slipped 20 per cent or more from their 52-week highs.

 

Of the approximately 1,020 stocks in these segments, 692, or 67 per cent, have moved into bear market territory. As many as 936 such stocks reached their peak levels earlier this calendar year, according to ACE Equity data.

 

While their respective indices — the Nifty Midcap 100 and Nifty Smallcap 100 — have seen relatively moderate declines, the broader picture remains grim. The midcap index is down 11.3 per cent from its 52-week high, the smallcap gauge has fallen by 10.9 per cent, and the benchmark Nifty 50 is down by 10.7 per cent. 

 

The sharp pullback in mid and smallcap stocks, according to analysts, signals a cooling-off period in the segments that previously attracted considerable investor interest. This shift, they said, reflects a broader lack of confidence that the market will stage a swift recovery. 

 

The fall from peak levels for these stocks has also been on account of earnings disappointment, besides relatively expensive valuations, said Gaurang Shah, senior vice-president at Geojit Financial Services.  While midcaps may be better positioned for recovery, Shah anticipates further challenges for small and microcap stocks. 

 

“Small and microcaps may see some more sell-side pressure as the September 2024 quarter earnings for these segments have been a disaster,” said Shah. “One needs to be stock-specific regarding midcaps as well. Select midcap stocks of banks, non-banking finance companies (NBFCs), microfinance companies, and cement and metals firms are likely to do well.” 

 

Among the hardest-hit stocks are Fusion Finance, Spandana Sphoorty Financial, and GVK Power & Infrastructure, which have seen their market values declining by 70 per cent or more from their 52-week highs. Other notable casualties include Zee Entertainment Enterprises, Sun Pharma Advanced Research Company (SPARC), Dish TV India, MTNL, and Chennai Petroleum Corporation, all of which have experienced declines ranging from 55 per cent to 62 per cent. 

 

From a macroeconomic perspective, analysts remain cautious about the broader market’s outlook, citing ongoing global uncertainties, potential changes in interest rates, domestic corporate results, stubborn inflation, and a significant depreciation of the Indian rupee against the US dollar.

 

G Chokkalingam, founder and head of research at Equinomics Research, predicts that the recovery in mid and smallcap stocks will be gradual. He cautions that there may be further downside before any significant rebound. For investors with a high-risk appetite, Chokkalingam recommends selectively entering these sectors at lower price levels, focusing on companies where sharp corrections have occurred despite strong fundamentals. 

 

“It is worth taking a risk and slowly increasing exposure to quality small and midcap stocks as many quality stocks from both these segments have corrected significantly in the past few weeks. Our research strategy is to accumulate quality small and midcap stocks and stay invested for one to two years for possible wealth creation,” he added.