The sell-off in the broader markets worsened on Wednesday, with the benchmark gauges for the small- and mid-cap stocks dropping the most in two years as valuation concerns raised by the Securities and Exchange Board of India (Sebi) prompted investors to take money off the table. The Nifty Smallcap 100 index plunged 5.3 per cent, while the Nifty Midcap 100 dropped 4.4 per cent in what was their biggest single-day fall in nearly two years. After dropping nearly 2 per cent, the benchmark Nifty recouped some losses – as investors moved to the safety of large-caps – to finish at 21,998, down 338 points, or 1.5 per cent. The Sensex, after dropping 1,152 points, or 1.6 per cent, finished at 72,762, down 906 points, or 1.23 per cent. Only 350 stocks ended with gains, while 3,569 fell on the BSE, with Rs 13.5 trillion worth of market cap getting shaved off.
The Sebi chief, Madhabi Puri Buch, on Monday also reiterated concerns over stretched valuations. She said there are pockets of froth in the market, and it may not be appropriate to allow that froth to build up.
There was also nervousness ahead of the stress test report on their mid- and small-cap schemes, which mutual funds are supposed to submit by the end of this week. Stress tests of mutual fund (MF) schemes help figure out if the portfolios are liquid enough to meet a sudden surge in redemptions. Market players said some fund managers were churning their holdings, which exerted selling pressure, particularly in stocks with relatively low float. Further, the raids against Dubai-based trader Hari Shankar Tibrewala have also led to a sell-off in small-cap stocks in which he has exposure, market players added.
Bhat added that there is fear that mutual funds may hold some of the stocks held by Tibrewala.
From its record high of 16,566 on February 7, the Nifty Smallcap 100 index is now down 14 per cent, while the Nifty Midcap 100 index has come off 7 per cent. Analysts said there could be more pain in the offing for small and mid-cap stocks.
“Small and mid-cap stocks are trading at a much higher valuation than large caps, and that is not sustainable. Therefore, it has to give way. In the medium term, there is no scope for upside if they don’t produce some surprise in earnings,” said Bhat.
Andrew Holland, CEO of Avendus Capital Alternate Strategies, said the uncertainty around regulatory oversight is greater than it was after the recent actions by RBI and Sebi.
“Everything got tarred with the same brush on the way up, and now everything is getting tarred with the same brush on the way down. There is no new trigger globally or locally to move stocks. It may just be that profits are being taken off the table,” said Holland.
First Published: Mar 13 2024 | 7:41 PM IST