Small and mid-cap stocks in India’s stock markets have witnessed selling pressure in the past few days. Tuesday’s fall in the small and mid-cap indices was the third consecutive day of decline, indicating selling from retail investors. Year to data, the Nifty Small-cap index has declined by 10.32 percent and Mid-cap index is down 7.9 percent. On Tuesday, both the indices were down 0.91 percent and 0.35 percent, respectively. In comparison, Nifty has declined by 6.85 percent and Sensex was down 5.81 percent, so far during the year.

On Tuesday, 698 stocks on the NSE were down between 20 percent to 40 percent and 223 stocks fell between 10 to 20 percent.

‘Low margin of safety’

A recent report by ICICI Securities said that in the current scenario, mid and small caps have ‘low margin of safety’ due to current profit but the end of quantitative tightening cycle (referring to the near peak central bank interest rates) and the estimated profits for next few years could lend support.

Further, the report said that selling by the foreign portfolio investors (FPIs) in the small-cap stocks since 2018 was likely near its end. FPI holding in small caps has been on a downhill since the peak of 2018 when they held close to 17 percent but formed a bottom of 12 percent in June 2022 and since then has risen to 13 percent at the end of December 2022. Mid-caps on the other hand haven’t seen any major erosion in FPI holdings since the peak of 2018 and oscillated in 14-16 percent range, the report said.

According to Vinod Nair, Head of Research at Geojit Financial Services, the selling in small and mid-cap stocks was also due to most investors booking loss with a view to adjust short term and long term capital gains tax. “Nifty small and mid-cap stocks continue to underperform due to fall in investors’ risk appetite and tax harvesting for FY(financial year) 2023,” Nair said.

According to the ICICI Securities report, the peak of the aggressive rate hike cycle for the US and likely pivot at some point going ahead will be positive for mid and small cap valuations. “Key risk to mid and small caps is a surge in the discount rate like the one observed during 2022 which resulted in their underperformance. However, 2023 has started off with the downshifting of the rate hikes by the US Fed as inflation starts to moderate. Rate hike cycle may halt during calendar year 2023, which is positive for the valuations of mid and small caps in general.

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