Smallcap, Midcap indices: 4 reasons why J.P. Morgan sees 5%-10% further downside risk

The  Nifty Midcap 100 and Nifty Smallcap 100 index ended  1.19-1.24% lower on Tuesday, as correction in mid cap and small cap stocks continued.

The Nifty Midcap 100 index after touching highs of 49,780.65 has slipped more than 8% to below 46,000 levels now while the Nifty Smallcap 100 index has cracked more than 10% from highs of 16,691.60 to around  14776 levels now.

As the mid and small cap valuations were considered expensive by experts, other reasons for correction attributed by analysts include the profit booking in the last month of financial year, various taxation reasons and so on.  The global markets are witnessing volatility as global cues remain a mixed bag and dates of general elections in the country too have been announced.

JP Morgan expects volatility in the small and mid cap space to continue and a risk of 5-10% further more downside.

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JP Morgan in their India Strategy report dated 19 March said that “We think the SMID (small and Mid cap) space could remain volatile in the coming weeks (India market volatility in election years tends to rise from end March), with margin funding and investor flows adding to risks. Judging by previous corrections in the SMID space, there could be 5-10% further downside from here” .

Four Reasons why JP Morgan analysts expect the volatility to persist in near-term -

(1)Based on  the median correction observed in the small-cap and mid-cap indices in the past, they estimate that there may be an additional 5%–10% negative risk.

(2) Also the dates of the next general elections in India—which will take place from April 19 to June 1—were released by the Election Commission, with counting to take place on June 4th, 2024. In the past, the market has often seen a prolonged period of heightened volatility before elections, which rapidly decreases afterward.

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(3) The rise in margin financing for trading as per JP Morgan analysts raises the risk of margin selling triggers should there be substantial drawdowns.

 (4) The tide seems to be slowing for small-cap funds, said JP Morgan. Even while the small-cap sector saw strong inflows of ₹29 billion in February, they were 10% less than in January—which had already decreased from December.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions

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