BSE Mid & SmallCap indices sink 3%: What's driving the underperformance?

In Friday’s subdued trade, the MidCap and Smallcap indices saw sharp underperformance against benchmarks. The BSE Midcap and Smallcap indices dropped nearly 3 per cent each intra-day versus marginal losses in the BSE Sensex and NSE Nifty. 

The broader market breadth was weak with 2,813 stocks declining and 823 gaining on the BSE. 

Among Midcaps, PFC, General Insurance Corp, NHPC, REC, SJVN, Ramco Cements, UCO Bank, Indian Overseas Bank and IRFC were the top drags with losses of 6-11 per cent. 

MSTC, AstraZeneca Pharma, Surya Roshini, OnMobile Global, Dhani Services and Rail Vikas Nigam were the leading SmallCap losers, down 10-15 per cent. 

Analysts said Friday's decline is largely due to profit-taking after the consistent rally in the two segments. Given the uncertain global macro landscape, investors may also be parking money towards largecaps, they say. 

"Global cues including the lack of clarity about the timing of rate cuts in the US, geopolitical tensions are impacting the risk appetite, leading to selling in mid and smallcap stocks. Some investors might be rotating their portfolios towards largecaps, which are perceived to be safer bets in a volatile market," said Pravesh Gour, Senior Technical Analyst, Swastika Investmart. 

Meanwhile, Vishnu Kant Upadhyay, Assistant VP- research & advisory at Master Capital Services expects any potential slide in the two segments ahead to be contained within the 4-6 per cent range. 

The BSE Midcap and Smallcap indices have notably clocked stupendous gains of 66 per cent and 72 per cent, respectively, in FY24, far outweighing the 21 per cent rise in the BSE Sensex.  

Even in January, when the markets were volatile with benchmarks losing 0.7 per cent, the two indices rallied 5-7 per cent. This too has invited caution from experts amid concerns of stretched valuations.  

“Many stocks in the mid and small cap universe including PSUs have vertically rallied and valuations look stretched in the medium term. It's better to take some profits from the table and keep the rest invested,” said Kranthi Baithini, Director, equity strategy at WealthMills Securities. 

Moreover, given the sharp outperformance across largecaps and midcaps in the past year, wealth management firm Investec sees nearly 90 per cent probability of a market correction of at least 10 per cent in 2024. 

The firm, however, rules out any imminent crash (over 25 per cent decline) as it believes valuations are not excessive and historical imbalances have corrected. 

“While external factors and geopolitics remain risks, our vulnerability today is lower than in the past,” it said in a note, laying out Delhivery, Equitas SFB, Angel One, Policybazaar, Exide and Petronet as its top Mid and SmallCap bets.