A day after suffering losses of 5 per cent, the BSE Midcap and Smallcap indices saw healthy gains, rising over a per cent each, in the morning session of trade on Thursday, March 14.
The BSE Midcap index was up 1.02 per cent while the BSE Smallcap index was up 1.6 per cent around 10:25 am. The benchmark Sensex was 0.10 per cent up at that time.
The steep fall experienced by mid and smallcap stocks in the previous session stemmed from growing concerns surrounding their inflated valuations. Experts had long cautioned about the presence of froth and bubbles within the smallcap sector, which ultimately prompted investors to book profits.
According to Kotak Institutional Equities, most mid and smallcap stocks are still trading at lofty valuations despite the sharp correction in recent weeks.
“We are not sure if the correction marks a reversal of the market to fundamentals and numbers from sentiment and narratives. If it is the former, many low-quality stocks may still have a long way to go, in our view,” said the brokerage firm.
The brokerage firm underscored that the high returns over the past three years and the expectations of similar returns may have reinforced the direct and indirect participation of retail investors in the mid and smallcap segments.
“The mid and small-cap funds of domestic institutional investors (mutual funds) had become ‘passive’ conduits for ‘active’ non-institutional investors who were probably more focused on momentum and narratives than fundamentals and numbers,” said Kotak.
Meanwhile, experts expect the smallcap segment to see some more correction as the valuation of the smallcap space is still high and suggest shifting focus to quality largecap and midcap stocks.
“The lesson from market history is that frothy valuations are unsustainable. Therefore, the blood bath in the broader market which happened yesterday is hardly surprising to sane minds in the industry. There is room for the broader market to correct more since the valuations continue to be elevated. Investors should now focus on largecaps and quality midcaps,” said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
“The turbulence in the market will give cherry-picking opportunities. High-quality private sector banks and the leading names in capital goods, telecom and autos can be accumulated in a calibrated manner. It is important to understand that India’s macro fundamentals continue to be good and the bull market is intact,” said Vijayakumar.