Nifty Smallcap 100 tanks over 2% to near 8-month low; 70 index stocks crash up to 69% from one-year highs

Indian Stock Market: After a mild recovery in the previous trading session, Indian frontline indices resumed their downward trend on Tuesday, with both Nifty 50 and Sensex falling up to 0.70% on February 18. The decline in the small-cap stocks was even more severe.

The Nifty Smallcap 100 index tumbled another 2.21% in trade, reaching 15,072. Another 107-point slide in the small-cap index will push it past the June 2024 low of 14,966. The index has remained in negative territory for seven out of the last eight trading sessions (including today), losing nearly 11.62% of its value. From the January high of 19,224, it is down by 21.36%.

It dropped nearly 10% in the past week, marking its biggest weekly decline since March 2020, when it fell by 17.71%. Moreover, the recent crash has caused the index to correct by 24% from its all-time high of 19,716, which was reached on December 12.

The continued pressure on the small-cap segment is due to the poor earnings in the December quarter, which led brokerage firms to trim their EPS estimates and, consequently, target prices for many stocks. Investors had hoped for a rebound in earnings in Q3 after a poor show in Q2, but the results were disappointing.

In addition to concerns over valuations and weak earnings, escalating global trade tensions have further dampened investor sentiment, prompting to flee from risky assets, particularly those with inflated valuations.

Despite the sharp fall in recent months, analysts still believe that valuations remain stretched across many stocks, contributing to the sustained sell-off. The small-cap index is trading at a forward 12-month price-to-earnings (PE) ratio of 26.4x, well above its 10-year average of 16x.

In contrast, the benchmark Nifty 50’s PE ratio of 20.3x is just below its 10-year average of 20.6x. Analysts have been warning about the rich valuations in the small-cap segment, yet retail investors poured billions into small and mid-cap stocks, hoping for multibagger returns.

As the downturn in their favourite segment continues, portfolios are bearing the brunt as 75 out of 100 constituents of the Nifty Smallcap 100 index are trading down by 30% to 69% from their respective one-year highs.

In the Nifty Smallcap 250 segment, 200 stocks have declined by 30% to 72% from their 52-week highs, highlighting the deepening pain in the small-cap sector. For context, small-cap stocks began their one-way rally in March 2023 and maintained that momentum for 18 months, rising as much as 113% without any significant pullbacks.

Strong US markets pose capital flight risk for emerging markets

Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said, “The weakness in the market persists despite the mild recovery witnessed yesterday. The market construct doesn’t favour a rally in the market. FIIs are likely to continue to sell. News flows are not positive. The US market continues to be strong and may attract more capital flows to the US from other markets.”

He further highlighted a significant development in China, where President Xi Jinping has emphasized the need for a “clean relationship” between the government and businesses. This is regarded as a favourable development for reviving the Chinese economy, which is struggling now from the fallout of the crisis in the real estate sector. 

“If the Chinese government’s new initiatives attract positive responses from the FIIs, that means more bad news for Indian markets. More money will flow into Chinese stocks through the Hang Seng exchange since the PE of the Hang Seng index is only around 12 compared to the 18.5 one-year forward PE in India. Since largecaps are fairly valued in India, calibrated buying in this segment can be done. But the market construct doesn’t favour aggressive buying,” he further stated. 

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.