The Indian stock market experienced a significant downturn, with smallcap and midcap stocks facing the worst crash since the Covid market meltdown in March 2020. The BSE Smallcap index fell 14% in February, while the Nifty Midcap 100 dropped 10.8%. Analysts attribute this decline to high valuations, liquidity concerns, and investor fears over potential rate hikes and a slowing economy.
Technical analysts point to significant breakdowns in support levels for both indices, which have worsened the downtrend. These breakdowns suggest a potentially prolonged bearish phase unless a strong recovery in earnings or a reversal in market sentiment occurs. The recent corporate earnings season revealed significant weaknesses, with many companies failing to meet expectations.
This has led some investors to exit positions in smaller and mid-sized companies, further pressuring the indices. Given the current market conditions, investors are advised to approach with caution. Market experts recommend waiting for more signs of stability before making significant investments in smallcap and midcap stocks.
Long-term investors may find opportunities if they focus on companies with strong fundamentals and manageable debt levels. In a holiday-shortened week, the broader indices underperformed the main indices amid concerns over high valuations.
Smallcap, midcap stocks face steepest drop since Covid
Continued foreign outflows and uncertainty over US tariffs also contributed to the pressure on the main indices. All sectoral indices ended in the red, with the Nifty IT index dropping 8%, Nifty Media declining by 7%, Nifty Realty by 5.5%, Nifty PSU Bank by 5.3%, and Nifty Energy falling by 5%. Vinod Nair, Head of Research at Geojit Financial Services, said, “The Indian equity market closed the holiday-shortened week on a significantly weaker note, as investor sentiment deteriorated due to escalating trade tariff concerns and unfavorable global cues.
The IT sector faced the sharpest decline amid fears of a weakening U.S. business environment, leading to deal deferrals. Additionally, concerns over high valuations continued to weigh on small and mid-cap stocks.”
Experts advise investors to take refuge in large-cap stocks during the ongoing rout in the small- and mid-cap space. However, the Nifty Next-50 index, classified as a large-cap index, suffered a 22.3% decline, surpassing even the small-cap index’s 20.2% drop.
In contrast, the Nifty-50 corrected by just 12.9% during this period. In such volatile times, it is important to understand the significance of buying quality stocks and focusing on valuations rather than chasing momentum. Investors should use the volatile phase to exit underperforming stocks with weak fundamentals.
Remember, the time spent in the market is more important than timing the market. Base your decisions on real facts and analysis rather than risky, speculative forecasts.