“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 fall, in our view,” Sanjeev Prasad of Kotak Equities said in a note to investors.
While the downside seen in high-flying small and midcaps looks big on the immediate scale, it is quite small in the context of the large returns of the past year. Nifty Midcap100 and Nifty Smallcap100 are down 5% and 10% in the past one month but they are still up 53% and 58%, respectively, in the past one year.
“We find the valuations of the majority of the midcap and smallcap stocks to be quite expensive, especially in the context of their business models as well as their own history,” Prasad said, adding that retail investors are more exposed to the ongoing correction as institutional investors favor largecap stocks over midcap and smallcap stocks.
Also read | Little stocks in big trouble! 374 smallcaps fall at least 30% from peak. Worst ahead?
The mid and smallcap funds of mutual funds had become ‘passive’ conduits for ‘active’ non-institutional investors who were probably more focused on momentum and narratives than fundamentals and numbers, he said.
Sebi and the AMFI (Association of Mutual Funds in India) have directed mutual funds to provide additional disclosures for small- and mid-cap funds from this month.
Earlier this week, Sebi chairperson Madhabi Puri Buch had flagged the issue saying there are pockets of froth in the market and that it may not be appropriate to allow that froth to keep building. She had even compared the valuations to “irrational exuberance”.
The regulator has also noticed signs of manipulation in the SME (Small and medium enterprises) segment, many of which have given multibagger returns in just a few weeks.
Also read | Sebi chief flags bubble in midcap, smallcap space
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)