Small & mid-cap stocks lose steam

Drop 5% in four trading sessions as investors move out; watchers say shift was due, with earlier rally not sustainable

After a robust rally, small-cap and mid-cap companies seem to be losing steam, following a change in investor sentiment due to the fears surrounding tapering of the US Federal Reserve’s stimulus programme and on the Chinese economy.

Investors were seen dumping shares in these counters, which had rallied as much as 30 per cent since August last year, more than their larger peers. “Since the past few days, we have been seeing heavy selloff in this segment, as investors were seen selling to book profits. We are expecting some more weakness across sectors in the small- and mid-cap space,” said Alex Mathew, head of research, Geojit BNP Paribas Financial Services.

On Monday, mid-cap and small-cap indices fell nearly three per cent, even as the broader market indices declined two per cent on the grounds for worry mentioned earlier. The BSE Sensex ended the day down 426 points or two per cent at 20,707; the National Stock Exchange’s Nifty fell 131 points or two per cent, to 6,135.

Market watchers said a decline in shares of smaller companies was due, given the significant run-up over the past few months. “It looks like the party in the mid and small-cap stocks is over for now. Most of these had been undeservingly going up, even as the fundamentals did not support the rise,” said Sachin Shah, fund manager, Emkay Investment Managers.

The rise in mid and small-cap stocks started in late August last year. The BSE mid-cap index has risen by 19 per cent since;the small-cap index has gained close to 20 per cent. The BSE Sensex has during this period risen about 15 per cent.

Analysts said the cap rally was largely driven by the huge valuation gap and had less to do with a change in fundamental factors. With the rise in these stocks losing steam, investors in these would do well to sell their holdings, analysts said.

“Investors should only hold on to those stocks which have delivered good results and where valuations seem reasonable. In stocks which have gone up without any reason, investors should look at booking profits,” said Shah.

Some in the market believe this might already be happening, as the heavy selling has been witnessed in stocks of this segment. In the past four trading sessions, the mid-cap and small-cap segments have declined about five per cent each. “These could decline further by five to 10 per cent, after which we could see signs of buying in these," said Mathew.

Market participants said if the Nifty wasn’t able to sustain above 6,300-levels, investors would be well off if they stayed away from stocks in mid-caps and small-caps. However, some sections believe there is still some value to be unlocked in the mid-cap and small-cap stocks of export-oriented sectors such as technology and health care. These companies have been doing well, on the back of a weakening rupee, and would likely continue to do well, analysts said.