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Business News/ Markets / Stock Markets/  Stock market today: Midcaps crack 3%, smallcaps plunge 4% as stock market sentiment turns negative

The dream run of mid and small-caps may be at its end as the BSE Smallcap index plunged almost 4 per cent while the BSE Midcap index cracked nearly 3 per cent in morning trade on Tuesday.

The BSE Midcap index fell to an intraday low of 32,052.46, down 3.06 per cent against the previous close of 33,064.96 while the Smallcap index plunged to its intraday low of 36,931.57, down 4.16 per cent against its previous close of 38,533.40 in Tuesday's trade.

The BSE Midcap index finally ended with a loss of 2.96 per cent at 32,084.93 while the BSE Smallcap index plunged 4.02 per cent to end at 36,982.74.

Early morning today, both the mid and smallcap indices hit their fresh record highs of 33,245.85 and 38,769.33 respectively.

Equity benchmark Sensex was also on a volatile track. The equity benchmark saw a swing of nearly 600 points within the first two hours of trade. Meanwhile, Nifty50 hit its fresh record high of 20,110.35 in the morning session today but witnessed volatility thereafter. 

Sensex opened 380 points higher at 67,506.88 against the previous close of 67,127.08 and swung between gains and losses through the session. The index took a swing of 591 points during the session, hitting the intraday high and low of 67,539.10 and 66,948.18 respectively.

Nifty, on the other hand, opened at 20,110.15 and scaled a fresh record high of 20,110.35 during the session. But it failed to hold altitude and suffered strong bouts of volatility during the session.

Sensex closed at 67,221.13, up 94 points, or 0.14 per cent while the Nifty closed the day at 19,993.20, down 3 points, or 0.02 per cent.

Experts were expecting the market to see profit-booking after the recent rally. Some of them were quite vocal in advising staying away from mid and smallcaps.

"Investors should avoid the frothy segments of the mid-and small-caps. In the near term, the market is likely to consolidate around the present levels," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

What led to the recent market rally?

This year so far has seen robust gains for mid and smallcaps. The BSE Midcap index has surged nearly 31 per cent while the BSE Smallcap index has jumped 33 per cent this year so far (as of September 11 close). Benchmarks the Sensex and the Nifty have gained over 10 per cent this year. 

Many mid and small-cap stocks have witnessed a steep rise which seems disconnected from the fundamental factors. Instead, it appears to be driven by investor irrationality, fueled by recent high returns rather than improved company fundamentals, said brokerage firm Kotak Institutional Equities in a report on September 11.

"We see a limited point in trying to find fundamental reasons behind the steep increase in stock prices of several mid-cap and small-cap stocks. There is no meaningful change in the fundamentals of most companies; in fact, they have worsened in many cases. The primary driver of the rally appears to be irrational exuberance among investors, with high return expectations (and purchase decisions) being driven by the high returns of the past few months," said Kotak Institutional Equities.

Read more: Mid-caps, small-caps soar despite no material change in fundamentals; irrational exuberance could be at play, says Kotak

Market sentiment has been extremely bullish in September on hopes of the end of the monetary tightening cycle. The robust domestic macroeconomic outlook, too, boosted sentiment. 

"We believe a key reason for the equity markets doing better over the last few months is an expectation that we are close to the end of the interest rate upcycle. The reason why small and midcaps have outperformed in recent times is that the incremental domestic flows are concentrated in this category and the smallcap category had meaningfully underperformed in the previous phase, as explained earlier," Harshad Patwardhan, CIO at Union Asset Management Company (AMC) Private Limited, told Mint.

Read more: Are small-cap stocks in a bubble? Experts tell you how to trade in smaller companies

Sentiment turning cautious now

However, sentiment is turning cautious now as most positives are already discounted and the market has shifted its focus to monetary policy meetings of the major global central banks in the coming weeks. 

Besides, a weak monsoon, steep rise in crude oil prices, selling by the FIIs (foreign institutional investors) and rich valuations of many small and mid-cap (SMC) stocks are matters of concern.

Read more: India August inflation preview: India's August inflation may be significantly above RBI's 2-6% target range

G. Chokkalingam, Founder and Head of Research at Equinomics Research pointed out that the overall market capitalisation has crossed 320 lakh crore, which is around 107 per cent of the estimated FY2024 nominal GDP of India. Sensex’s trailing PE (price-to-earnings ratio) also stands at 24.3, significantly above the long-term average PE.

Moreover, there is a flood of IPOs which are taking away financial resources from the investors.

"Many promoters have sold some of their stakes in the markets and some loss-making companies have mobilised resources through rights issues. We believe that soon we might see a shortage of liquidity to support the SMC stocks on the secondary markets. If we look back at the history of the last 30 years, many steep corrections in the small-cap space happened after a massive rally in the IPOs," Chokkalingam said.

"Another possible risk factor to the markets is forthcoming state elections in Rajasthan and Madhya Pradesh. If any sentimental impact happens to the stock markets, then it would be very difficult to find liquidity to support the markets, especially for the SMC stocks," said Chokkalingam.

Read all market-related news here

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


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Updated: 12 Sep 2023, 04:29 PM IST
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