Stocks in the broader markets witnessed fresh turbulence amid growing headwinds such as rising US bond yields, oil prices and geopolitical uncertainty.
The Nifty Smallcap 100 index dropped nearly 2 per cent, while the Nifty Midcap 100 index fell 1.3 per cent.
Both underperformed the benchmark Nifty, which fell 0.72 per cent.
This was the worst fall for the smallcap index since September 12, when it had tanked over 4 per cent.
Lately, brokerages have been sounding caution over stocks in the small and midcap space following a surge from their lows in March.
Last week, Citi said it had narrowed the list of preferred midcap stocks, citing stretched valuations. Their fundamentals are “unchanged” but valuations are at a premium compared to larger stocks, it said.
The brokerage said disproportionate inflows into small and mid-caps probably contributed to the strong out-performance.
Kotak Institutional Equities, in a note on Monday, told its clients to rotate small and midcaps stocks with largecaps. “We see better investment opportunities and reward-risk balance in the top largecap names than in other parts of the market. We expect the largecap laggards of 2022-23 to do better over the next 6-12 months. Other largecap and quality midcap stocks may see a period of time correction.
Narrative-based mid and smallcap stocks will eventually see large price or lengthy period of time correction,” it said.
In the past six months, the Nifty Smallcap 10 and the Nifty Midcap have gained 37 per cent and 31 per cent, respectively. By comparison, the Nifty 50 index is up 11 per cent.
“We do not find much value in most of our midcaps and smallcaps,” the Kotak note added, warning of potential draw downs, going ahead.
On Monday, out of the 3,929 stocks traded on the BSE, 2,804 ended with losses, 993 gained and 132 remained unchanged.