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Mid- & small-caps have more pain in store

Mumbai: Money managers and equity analysts are recommending investors to steer clear of mid- and small-cap stocks as a steeper correction could be in store. With stock prices of smaller companies remaining under pressure in recent months, causing erosion in values of equity portfolios, many retail investors might hesitate bringing fresh money into schemes – especially those that bet on mid- and small-cap schemes – in the coming months.

The waning investor interest in smaller companies was evident on Monday as the BSE Midcap index fell 1.4% to 20,999.37 and the BSE Smallcap index declined 3% to 23,422.16, even as the benchmark Sensex ended with gains. The Sensex ended up 0.46% at 51,597.84.

Agencies

“The selling is happening on low volume because there are no buyers so even a small selling lead to big price correction,” said Siddarth Bhamre, research head at Broking. “One should avoid the space altogether and let the market direction change first.”
Last week, the mid- and small-cap indices also suffered a technical breakdown following the Nifty. The broader market has been in a bear market zone for a few weeks now which means the mid- and small-cap indices are down over 20% from their record highs. The BSE Small-cap index is down 25% from its all-time high level of 31,304.44 hit on January 18 this year.

The BSE Midcap index is down 23% from its record high of 27,246.34 hit on October 19 last year. The Sensex is 17% off its lifetime high of 62,245.43 – also hit on October 19, 2021.

Another 10-15% fall in midcap and smallcap indices cannot be ruled out, said Rohit Srivastava, founder, Indiacharts.com.

Beneath the surface, the sell-off has been far more brutal with several stocks falling as much as 60-80% from their highs. Analysts said the risk-off sentiment could lead to a likelihood of slowing flows into equity schemes through systematic investment plans (SIPs).

“Last-two year return of SIP is zero and slowly it will lead to fund flows into SIP slowing,” said Bhamre. “Retail investors are not comfortable in the market because it is a bearish market for them so there are people who are stopping SIPs as they are jittery about putting in fresh money.”

Money managers said the risk reward is favourable to invest in large caps within the rising interest rate environment than mid or small caps.

“In the slightly longer term, it is not clear whether the global meltdown is complete but in the very short term these indices look oversold as per indicators. There is a case for a short-term bounce but it may not last for a couple of days,” said Srivastava

“We may have another 6-7 months of bear market in which we may see bear market rallies but the trend will remain bearish.”

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