Nifty small cap index enters bear territory, sheds 20% from mid-Jan peak

Illustration by Ajay Mohanty

The Nifty Smallcap 100 index, a measure of the performance of companies with market capitalisation of $1 billion, has slipped into bear market territory. The index is down 20 per cent from its peak touched in mid-January. The Nifty Smallcap 100 index has slipped more than nine per cent in May and is on course to post its worst monthly drop in over 18 months. The performance of the Nifty Midcap 100 index, which consists of companies with market cap between $1.5 billion and $4 billion, is equally bad. The index is down 15 per cent from its peak in January and is down 8.5 per cent this month.

The performance of the benchmark Nifty is hiding the carnage in the small- and mid-cap space. The 50-share index is down just two per cent this month and has come off just five per cent from its peak.

The broader market sell-off is so severe that a 185 out of the 1,759 companies that are traded on the National Stock Exchange (NSE) have lost more than half of their value this year. Nearly 60 per cent of the NSE listed stocks have lost a third of their value.

"Due to worsening macro situation, investors are moving into safer zone," says Ravi Muthukrishnan, head-institutional equity research, Elara Securities.

Shuffling of stocks by equity mutual funds to comply with the new categorization norms has partially led to the fall. But experts say the real issue that has spooked investors is the micro headwinds such as weakening of the rupee, surging bond yields and rising fuel prices.

The top 10 losers in the Nifty Smallcap index have lost more than 40 per cent since January 15, when the index touched a record high. Reliance Naval, Hindustan Construction and Reliance Communications have plunged over 60 per cent each. While stocks such as Jet Airways, IFCI and Allahabad Bank have crashed nearly 50 per cent each. The components of the Nifty Midcap index have dropped even more. Vakrangee, PC Jeweller and Adani Power are down 89 per cent, 72 per cent and 53 per cent respectively.

"The valuation premium of midcaps and smallcaps over large caps was very high. We were expecting the premium to come down substantially. We are seeing that play out now," he added.

The sharp fall in some of the stocks has caught several money manages off guard. A lot of funds focused on the small- and midcap stocks are staring huge losses.

Experts say the stocks in this space could correct further as investors will try to shift to largecaps which are holding the ground.

"We expect midcaps to further fall as investors to switch to large-caps. However, one shouldn't completely ignore this space. The recent falls also provides an opportunity to buy quality midcaps," said Muthukrishnan.

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