Sell-off in mid, small-caps to bottom out soon

Equity markets pulled back last Friday as hotter-than-expected US inflation print lifted bond yields to 2.05% in the US, a level last seen in August 2019.

The spike came after US inflation stood at 7.5% in January, marking the highest year-on-year rise in consumer prices since 1982.
 
Risk sentiment was then further dampened when St Louis Fed President James Bullard, a member of the Fed’s rate-setting committee, said he’s now hoping for a full percentage point of interest rate rises in the first half of the year.

A risk-off sentiment in global markets, therefore, hit Indian benchmarks as well.
 
On their part, yields on 10-year India bonds eased 0.36%, while those on two-year bonds dipped 0.1% on Friday, seeking comfort from the RBI’s dovish monetary policy.

Nonetheless, the S&P BSE Sensex and the Nifty50 ended 1.3% down each at 58,153 and 17,376 levels, respectively.
In the broader markets, the midcap and smallcap indices on the BSE fared worse, closing 2% lower each.
 
Analysts expect this underperformance of the mid-and small-cap segments to continue for a few more weeks; but stage a smart recovery thereafter.

"The market movement is difficult to predict at the current juncture, but a meaningful correction from here will make a lot of mid-and small-caps quite attractive. In this backdrop, there can be value buying at lower levels which can propel these two market segments higher," says A K Prabhakar, Head of Research, IDBI Capital. 

So, far in the current calendar year, the mid-and small-cap indices have underperformed the S&P BSE Sensex.

The fall in some of the stocks from these two segments has been sharper.

Stove Kraft, Jubilant Industries, Vodafone India, Vaibhav Global, Sterlite Technologies, Mahindra Logistics, Dr Lal Pathlabs, Radico Khaitan and Tata Teleservices (Maharashtra) have lost between 20% and 35% during this period.

On the other hand, DB Realty, GMDC, TV18 Broadcast, Orient Bell and Himadri Speciality Chemical have rallied 40% to 161% during this period.

A host of factors, including nervousness in the market given the multiple headwinds and selling by retail investors, have been at play.

That said, the two segments are expected to bounce back and eventually outperform their large-cap peers in 2022 for a third straight year, analysts say.

Coming to this week's market trend, global headwinds including bond yield movement and FII activity will be one of the key drivers of the markets. Back home, retail and wholesale inflation print, listing of Vedant Fashions and stock-specific triggers will guide the indices.
 

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