As the stock markets continue to decline, more than two-thirds of the equities that make up the National Stock Exchange's (NSE) mid- and small-cap basket have entered bear territory, which is defined as a decline of 20% or more.

692 stocks, or 67% (more than two-thirds) of the approximately 1020 equities that make up these two categories, have dropped 20% or more from their respective 52-week high level.

According to ACE Equity statistics, the majority of them—936 out of 1020 equities that make up the NSE's mid- and small-cap segments—had already reached their respective 52-week high levels earlier in the year 2024 (CY24).

According to analysts, this market decline, especially in midcap and small-cap stocks, points to a cooling-off in sectors where there was previously high investor interest due to a lack of trust that the markets will soon rebound.

In addition to high valuations, Gaurang Shah, senior vice-president at Geojit Financial Services, claims that the decline from peak values in these areas has also contributed to profit disappointment. He stated that the mid-cap stocks are comparatively more well-positioned, but Shah believes that the small- and micro-cap firms will suffer more in the future.

Given that the September 2024 quarter profits for these segments were appalling, small and microcap stocks might experience additional sell-side pressure. In the case of midcaps, one must also be stock-specific. Despite general selling pressure, certain midcap stocks in the bank, non-bank finance businesses (NBFCs), microfinance firms, cement, and metals are probably going to perform well, Shah stated.

Fusion Micro Finance, Spandana Sphoorty Financial, and GVK Power & Infrastructure are the individual stocks that have lost the most market value—more than 70%—from their respective 52-week highs.

Other notable counters that have seen declines of 54% to 69% from their 52-week highs include Zee Entertainment Enterprises, Sun Pharma Advanced Research Company (SPARC), India Pesticides, Dish TV India, MTNL, and Chennai Petroleum Corporation.

According to analysts, the general market sentiment is still cautious from a macro perspective because of persistent global uncertainties, possible interest rate changes, and changing domestic factors, particularly corporate results and sticky inflation, as well as a notable decline in the value of the Indian rupee relative to the US dollar.

G Chokkalingam, founder and head of research at Equinomics Research, predicts that the mid- and small-cap market will recover slowly and warns that additional declines may be ahead before a modest upward trend begins.

He advises high-risk investors to start buying stocks from these sectors at reduced prices and to concentrate primarily on those firms whose declines have been severe despite sound fundamentals.

"Since several high-quality stocks from the small- and mid-cap sectors have had large corrections in recent weeks, it is worthwhile to take a chance and gradually increase exposure to these stocks. In order to potentially create wealth, our research approach is to amass high-quality small- and mid-cap companies and remain invested for a period of one to two years," he stated.