Panic selling grips SMIDs as geopolitical fears drag benchmarks down 3%

Bears took charge of Dalal Street on the week’s first trading session on Monday, March 9, as the benchmark indices Sensex and Nifty tumbled over 3 per cent each during intra-day deals. The sharp sell-off came as the conflict in the Middle East entered its tenth day, pushing crude oil prices higher.

 

The BSE Sensex was down 2,494 points, or 3.16 per cent, at 76,424. Likewise, the Nifty 50 index crashed 753 points, or 3.07 per cent, to quote an intraday low of 23,697.

 

The sell-off, however, was more pronounced in the broader markets, with the Nifty Midcap100 and Nifty Smallcap100 indices plunging 3.57 per cent and 3.64 per cent, respectively, during intraday deals on Monday.

 

 

At last check, the Nifty Midcap100 index was trading with a loss of 3.29 per cent, while the Nifty Smallcap100 index was down 3.10 per cent.

 

In the midcap space, Union Bank of India, Hindustan Petroleum Corporation, Indian Bank, and Steel Authority of India were among the top laggards, trading with losses of up to 7 per cent. Similarly, in the smallcap space, Tejas Networks, SWAN Corp, Mangalore Refinery and Petrochemicals, and Karur Vysya Bank were among the top laggards, trading lower by up to 8.3 per cent.

What’s dragging the broader markets

Analysts attributed the market fall to multiple factors, including panic triggered by ongoing geopolitical tensions, high valuations, retail anxiety, limited liquidity, and weak institutional support.

 

“The sell-off is driven by panic caused by the ongoing war. Historically, whenever the broader market declines, small- and mid-cap stocks fall more, with small-caps taking the biggest hit. This is due to higher retail panic, limited liquidity, and lower institutional support. Such steep declines are usually followed by strong recoveries as valuations become attractive. Over the past 20 years, there has been only one instance when the Nifty fell while small-caps were marginally positive. Otherwise, small, and mid-cap stocks have consistently fallen more than large-caps during market corrections,” said G Chokkalingam, founder of Equinomics Research.

 

Echoing similar views, VK Vijayakumar, Chief Investment Strategist, Geojit Investments, said that during a market correction, particularly when there is panic like what we are witnessing now, mid- and small-cap segments tend to witness heavier selling.

Valuations remain a concern

Analysts, however, differed on the prospects for future recovery in the broader markets.

 

Chokkalingam believes recovery will follow soon as valuations are likely to turn cheaper due to the correction. “Over the past two decades, the key factor has been valuations becoming highly attractive. Small-caps crash, valuations drop, and a boom follows. For example, the post-Covid rally in small-caps delivered gains of around 40 per cent,” he added.

 

He said the cycle follows a simple logic: as valuations turn cheaper, they become more appealing compared with safer large-cap stocks. “This pattern is likely to repeat now, as nine out of ten small-cap stocks are sharply down, making valuations extremely attractive,” he said.

 

Vijayakumar, on the other hand, said that despite the correction, valuations are not cheap. “Valuations have become fair, but they are not cheap. Even now, Nifty is trading at around 21 times FY26 earnings. Explosive growth in the number of DMAT accounts, and sustained flows of money into mid- and small-caps, have pushed broader market valuations beyond reasonable levels. Of course, there are pockets of the market that are attractively valued, but mid-caps and small-caps as a whole are not yet compelling,” he said.

 

Vijayakumar further noted that if the war lingers longer, India’s macroeconomic conditions could be impacted. “At this juncture, there is uncertainty regarding the duration of the war and how long crude prices will remain high. If the crisis continues for two to four weeks, it is a shock the Indian economy can absorb. But if it lingers longer, it will certainly impact macro fundamentals, particularly inflation,” he said.

 

For investors, he suggested focusing on large caps rather than small- and mid-caps. “Even now, there are mid- and small-cap stocks trading at PE multiples of 35, 40, 45, or even 60. Large caps in banking, telecom, financials, as well as safe pharmaceutical and defense stocks, are available at fair valuations. Investors should focus on large caps now, not chase small caps, as small- and mid-caps remain risky,” Vijayakumar added.  ==================================== 

(Disclaimer: The views and investment tips expressed by the analysts in this article are their own and not those of the website or its management. Business Standard advises users to check with certified experts before taking any investment decisions.)