Has the crash in mid, small-caps bottomed out?

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Equity

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seem to be in the midst of a perfect storm, displaying an extreme volatility. The concerns related to inflationary pressure and policy tightening by the global central banks seems to have gotten exacerbated in the past couple of months, especially with the long-drawn geopolitical crisis in Europe, and the fresh wave of Covid-19 in China.

Over the past one-month the benchmark S&P BSE Sensex and the Nifty50 indices have declined over 5% each, while the BSE MidCap index has cracked over 8%. The BSE SmallCap index, on the other hand, plunged nearly 10%.



Such a slide in the indices came as investors gauged the spill-over effects of the macro headwinds such as inflation, margin pressure across sectors, and the cautious commentaries by various corporates.

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According to analysts, there are increasing concerns about building up on the possibility of a ‘stagflationary’ scenario, which coupled with rising bond yields, does not bode well for equities as an asset class.

The rising dollar index and the persistent selling by the FIIs are also not helping the cause. Given this, Milind Muchhala, Executive Director at Julius Baer India says all intra-day recoveries are getting sold off, and various technical levels are getting broken, making the more nervous. While there could be some technical pull-backs, the will continue to remain influenced by incremental flows related to central bank actions and inflationary trends in the short-term.

Muchhala also pointed out that FIIs seem to be holding one of the lowest net long positions in the recent times in the F&O segment, which can trigger some short covering in case the markets.

No wonder then that benchmark indices have gained close to 3% so far this week, as against 4% rally in the broader indices.

As broader indices see a sharper recovery after a steep knock, should one consider nibbling in the space?
According to analysts, while investors dumped mid-and small-cap stocks as the markets turned choppy, these two segments could see good investor interest from a medium-to-long term perspective.

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Speaking to Business Standard, G Chokkalingam, founder and CIO, Equinomics Research, reminds that corrections cycles are short-lived and valuations have corrected sharply. Individual mid-, small-caps have corrected up to 50%, he says, indicating that it is the best time for wealth creation. Broader indices to start performing within 2-3 months, he says.

Sujan Hajra, Chief Economist and Executive Director at Anand Rathi Shares & Stock Brokers, on the other hand, believes that the negatives have been over-estimated by the markets.

Hajra believes analysts are overestimating concerns on growth, inflation and pace of monetary tightening. The actual measures/policy steps could be moderate. Tightening inflation will improve over the next three to six months, he says adding that growth slowdown may trigger accommodative fiscal policies. Hajra is positive on equities from one year perspective.

Therefore, as expectations mount that mid and smallcaps may outperform their largecap peers over the next 1-2 years, Chokkalingam of Equinomics Research suggests investors should check the quality of the management and the guidance they give. Secondly, investors should pick stocks with 5-10 years of listing history. He says one must analyze the Balance Sheet’s strength before investing.

In nutshell, mid and smallcaps will likely outperform over the next 1-2 years as retail investors throng the markets in search for a better returns, and as macro headwinds subside over the next couple of quarters.

On Thursday, markets will track global cues, weekly F&O expiry, and March quarter results for the markets’ trajectory. Besides, initial public offer of Paradeep Phosphates and Ethos will be eyed.





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