Ashishkumar Chauhan, the MD and CEO of the NSE, stated on Wednesday that small investors who lack the ability to handle high risk levels had to stay out of riskier segments of the market.
Chauhan emphasized that riskier products with greater entry barriers should only be used by investors who can afford to take on risk. "Premium volume is lower, but equity F&O size appears larger," he said to the SEBI-NISM Research Conference audience.
The decrease continued for a third day on March 13, suggesting that the small-cap category stress is getting worse. At 12:30 PM, the benchmark Nifty 50 was down more than one percent. The markets were clearly showing signs of weakness, with over 3,333 equities declining compared to 422 increases. On the NSE, 869 stocks were locked in the lower circuit.
Brokers allegedly pressuring clients to liquidate holdings due to elevated risk perception is the source of the weakening.
Is it appropriate to hit the panic button?
The key to smallcap investing is bottom-up strategy. Although the high valuations may limit potential in the near term, analysts believe that many smallcap companies have bright futures.
"Fundamentally, the smallcap250 index has seen drastic improvement in earnings growth (26 per cent CAGR over FY22-24) supported by overall good economic recovery post COVID; market share gain led by formalization of economy; and strong balance sheet improvement across sectors. In addition, policy initiatives around Make in India and PLI incentives should drive positive delta change in earnings across different sub-segments particularly in the smallcap space," said Ankit Jain, Senior Fund Manager at Mirae Asset Investment Managers (India).
The last year has seen a 60% increase in the BSE Smallcap index. The returns from the NSE Smallcap250 index are comparable. According to Jain, the Nifty Smallcap250 is trading at over 22 times EPS on a one-year forward basis, which is nearly 50% above valuations at March 2018 levels and 21% above the historical average.
"The market breadth is declining, which is a sign of mean reversion in mid/small cap stocks from over bought trajectory. Mid and small cap indices have rallied 35 per cent since October 2023. Intermediate corrections to the tune of average 12 per cent in mid and small caps have been a bull market norm. At present 8 per cent correction is behind us," ICICI Securities said in a note.
