Stock market correction: How bad is the selloff in smallcap and midcap space?

The ongoing market correction has hit small-cap and mid-cap stocks hard, with over two-thirds of these stocks slipping into bear territory.
Data from the National Stock Exchange (NSE) reveals that 67% of the 1,020 stocks in these segments have fallen more than 20% from their 52-week highs. It may be noted that 936 of these stocks reached their 52-week peaks earlier in 2024, only to witness sharp declines amid broader market weakness.
Analysts attribute this drop to a mix of factors, including earnings disappointments and stretched valuations, which have dampened investor sentiment.
Despite aggressive selling by foreign portfolio investors (FPIs) in Indian equities, ICICI Securities recently noted that small-cap and mid-cap indices have shown relative resilience compared to the Nifty.
This suggests moderate selling pressure in these segments, likely due to FPIs’ preference for their higher growth potential and under-ownership.
However, the brokerage warns that these stocks remain vulnerable in a risk-off scenario, as their low liquidity could exacerbate losses.
“Even after the recent price correction, the margin of safety in terms of earnings yield spread remains low,” it said.
While FPIs reduced their holdings in Indian equities to a decade-low of 16% as of October-end, mutual funds stepped in with Rs 64,700 crore in investments, allocating Rs 12,100 crore to mid, small, and micro-cap stocks.
Yet, earnings cuts post-Q2 results paint a challenging picture, with JM Financial reporting that a significant portion of small and mid-cap stocks saw over 10% reductions in earnings estimates.
The broader decline in these segments indicates a cooling-off in areas previously buoyed by strong investor interest.
While mid-caps may be better positioned, market analysts and brokerages indicate that smallcap stocks could face uncertainty for a longer period.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)