What’s The ‘Froth’ In Small and Mid-Cap Stocks?

Broader markets bear investor pessimism as SEBI chief warns of ‘froth’ in mid and Small-Cap segments, triggering a significant downturn

The preceding fortnight proved to be exceptionally challenging for the broader markets, which had enjoyed a strong rally over the past year. Both the BSE Mid-Cap and the BSE Small-cap Index, which witnessed unprecedented gains of around 65-70 per cent each since April 2023 until reaching their respective 52-week highs, experienced a sharp decline due to intense selling pressure, resulting in a market bloodbath.[EasyDNNnews:PaidContentStart]

The downturn in the market became particularly noticeable following remarks from the SEBI chairperson Madhabi Puri Buch, who emphasised the existence of ‘froth’ in small-cap and mid-cap stocks, pointing to ‘off the charts’ valuations within these segments.

Investor pessimism extended to Large-Cap stocks, leading to losses in benchmark indices. The BSE Sensex and Nifty 50 recorded declines of 1.58 per cent and 1.59 per cent, respectively, over the past fortnight. A similar effect was also observed on the sectoral front. The BSE Realty, serving as a sectoral indicator for the real estate sector, emerged as the worst performer, suffering losses of more than 10 per cent.

Railway, PSUs, metals, power, and oil & gas sector stocks, which had enjoyed substantial rallies in recent months, underwent significant profit booking. The fast-moving consumer goods and information technology sectors were among those least affected.

Despite this hammering, institutional investors provided much-needed support to the market. Foreign institutional investors (FIIs) registered a net inflow of ₹9,264 crore, while domestic institutional investors (DIIs) demonstrated confidence in the Indian markets by injecting a substantial ₹24,277 crore over the past fortnight. In January, India’s industrial production expanded by 3.8 per cent, maintaining a consistent month-on-month trend, signalling a sustained growth momentum for the Indian economy. The eight core sectors, encompassing coal, crude oil, natural gas, refinery products, fertilizers, steel, cement, and electricity, collectively constitute around 40 per cent of the Index of Industrial Production (IIP).

India’s headline retail inflation rate eased to 5.09 per cent in February, as reported by the Ministry of Statistics and Programme Implementation, remaining within the tolerance level set by the Reserve Bank of India (RBI). The State Bank of India (SBI) saw a persistent decline in its shares, with a notable 7 per cent loss over the past week following a directive from the Supreme Court. The court emphasised the importance of full disclosure regarding electoral bonds, cautioning against any selective information sharing and highlighting concerns of ‘willful disobedience’ by the bank.

Let’s see how the market progresses in the future, particularly whether the selling pressure in mid and small-cap stocks subsides. Topics of discussion would also revolve around the year-end financial results, as well as the upcoming Lok Sabha elections.

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