Mid-cap and small-cap stocks decline as investors take profits amid stretched valuations

Synopsis

Mid-cap and small-cap stocks, which had recently outperformed, experienced declines as investors grew concerned about high valuations. Profit-taking occurred after significant gains in May, with indices falling. Despite potential further declines, analysts suggest buying quality stocks during dips, as domestic liquidity and limited global impact offer optimism.

Mumbai: Mid-cap and small-cap stocks - the outperformers in the recent market rebound - led the declines in equities on Thursday as investors grew wary of stretched valuations. The Nifty Midcap 150 and Small-cap 250 indices fell 1.6% and 1.9%, respectively, on Thursday, while the benchmark Nifty ended 0.1% lower.

"Post the outperformance in May, mid-cap and small-cap stocks are witnessing profit taking at higher levels as the valuations have become slightly stretched," said Nilesh Jain, head of derivatives and technical research, Centrum Broking. "Typically, quick up moves are followed by such retracements."

The Nifty Midcap 150 and Small-cap 250 indices surged 6.3% and 9.3% each in May, outperforming the benchmark index, which gained 1.7% in the same period. Mid-cap and small-cap stocks have performed better than large-caps as the perception that smaller companies are less impacted by the ongoing global uncertainties has fuelled domestic investor appetite in these stocks.

Continuous purchases from domestic equity mutual funds - flush with flows from individual investors - also drove up their share prices, pushing valuations back to their near-peak levels.

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"Mid-cap and small-cap stocks have rallied up to 35% from the April lows and outperformed the benchmark Nifty, which gained around 16% in the same period," said Pankaj Pandey, head of retail research, ICICI Direct. "Post the sharp rally, there is some consolidation in the market."

Jain does not rule out further declines of 2-4% for now, but recommends buying the weakness.

"While the short-term structure remains weak, most of the companies reported fairly inline earnings in this quarter and investors can accumulate quality picks in a staggered manner at further declines," he said.

Pandey said investors can 'buy on dips' as the global uncertainty is expected to have a limited impact on these stocks, and the RBI interest rate cut has boosted liquidity, which is incrementally optimistic.

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