Midcaps follow smallcaps into bear territory as selloff intensifies

The Nifty Midcap 100 index tumbled 3.12 per cent on Friday, mirroring smallcaps that have entered the “bear market territory”. The 100-share index, a barometer for the performance of companies with the market value ranging between ₹20,000 crore and ₹70,000 crore —extended its fall from the peak to 21.3 per cent.

 

The Nifty Smallcap 100 dropped 3.4 per cent, stretching its slide from the peak to 25.2 per cent. A bear market is a prolonged decline in stock prices with the major indices falling by 20 per cent or more from their highs.

 

Barring 10, all the Nifty Midcap 100 and Nifty Smallcap 100 components ended with losses. On the midcap index, the top losers were BSE, Fertilisers and Chemicals Travancore (Fact), Jubilant Foodworks, while on the smallcap index, Redington, Zensar Technologies, and MCX were the worst performers.

 

Several small and midcaps have seen over half of their value erode within months amid a brutal selloff in the market, exacerbated by concerns around expensive valuation and slowing earnings growth.

 

"Mid and smallcaps slipping into bear territory strongly indicate that fear has gripped small and midcap stocks. It might continue till the end of March. One hope is that selling for the sake of booking losses and realigning tax liabilities will be over beyond March. One is shocked to see the extent of the fall due to global factors. However, if uncertainty in US trade policy continues, more pain could be in the offing. Many stocks look appealing after the recent mid and smallcap space rout. But buying is not happening as there is no sign of market stability," said Chokkalingam G, Founder of Equinomics.

 

Analysts said while the valuations for the benchmark Nifty 50 index – which is down 15.6 per cent from the peak—have aligned with long-term averages, small and midcaps are still expensive vis-à-vis their historical averages.

 

"We remain cautious on the outlook for small and midcaps in general due to expensive valuations in many cases. We have been negative for a while, and despite the recent correction in the Nifty Midcap Index and Nifty Smallcap Index, we do not believe the valuations have come down enough,” said Pratik Gupta, CEO and co-head of institutional equity at Kotak Securities.

 

Market players said a sharp rally in the broader markets over the past two years was underpinned by strong domestic inflows, particularly via the equity mutual fund (MF) route. However, with the severe market correction, these flows are seen moderating. This, coupled with cuts in earnings growth estimates, is expected to lead to a de-rating in stocks.

 

“The nature of the MF flows has also changed from going into small/midcap or thematic/sectoral funds till a few months ago, to largecap or balanced debt-equity funds now. Those managing smallcap funds were understandably more cautious given the expensive valuations, and the risk of a disorderly selloff in case of any sudden redemptions,” added Gupta.

 

A note by Kotak Institutional Equities this week observed that “the continued weakness in broader markets has resulted in continued downgrades in consensus earnings for smallcaps compared to largecaps in Q3FY25. Post the Q3FY25 changes, midcap companies have seen an 11 per cent/9 per cent cut in their FY2025/26 estimates, while smallcap companies in the BSE 500 universe have seen 25 per cent/17 per cent cuts in FY2025/26 estimates in M11FY25.”  

FRIGHTFUL FEBRUARY 

February’s market selloff was brutal,wiping out a staggering ₹40 trillion in market value. The benchmark Nifty suffered its longest monthly losing streak in nearly three decades, while broader markets plummeted to their worst decline since the Covid-19 pandemic. The carnage left investors reeling, severely denting confidence in the market.