Red-hot smallcaps, PSUs running into bad weather; Sensex fell 523 points. stock market news

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Shares in the smallcap and public sector undertaking (PSU) sector witnessed a sharp decline on Monday as investors continued to take money off the table considering recent gains excessive.

The National Stock Exchange’s Nifty Midcap 100 and Smallcap 100 indices fell 2.5 per cent and 4.01 per cent, respectively, led by PSU stocks.

Many PSU shares fell by more than 5 per cent, resulting in the market capitalization of state-owned enterprises falling by nearly Rs 6.5 trillion in three days.

In comparison, the S&P BSE Sensex fell 523 points or 0.7 per cent to close at 71,073. Nifty ended the session at 21,616, down 167 points or 0.7 per cent.

Analysts said a correction, especially in broader markets and PSU stocks, was on the horizon as many stocks had climbed up on mere speculative buying, without any fundamental support.

“A large part (about two-thirds) of this smallcap and midcap (SMID) rally was liquidity-driven (supported by strong domestic inflows), while, for Nifty, it was due to earnings delivery. As a result, valuations for SMID have now increased, while, in comparison, Nifty continues to trade close to its long-term average valuation. With increased volatility in the first half of calendar year 2024, we will continue to prefer largecaps over SMIDs,” said Arbind Maheshwari, head of India equities at BofA Securities.

Some market experts have noted that due to high valuations, smallcap and midcap and PSU sector stocks are losing support from high net worth individuals and retail investors, who have been their key supporters.

In 2023, the Nifty CPSE index rose 73.7 per cent, while the Nifty Midcap 100 and Smallcap 100 rose 46.6 per cent and 55.6 per cent, respectively.

On a year-to-date basis, the Nifty CPSE index has gained 12.2 per cent, while the midcap and smallcap indices have gained 3.2 per cent and 3.1 per cent, respectively.

“Many retail investors entered the market in the post-pandemic bullish phase, and they panic whenever institutional investors sell. Valuations are definitely not in favor of small investors, so while they may continue with systematic investment plans, they may exit some direct investments,” said UR Bhat, co-founder, Alfaniti Fintech.

Sensex Intraday 12 February 2024

Chokkalingam G, Founder, Equinomics, said the earnings of many midcap and smallcap companies and PSUs do not justify the rise in their stock prices.

“Ultimately, unfair valuations will push stock prices down because valuations may reach higher levels, but liquidity to maintain that valuation is not unlimited,” Chokkalingam said.

The correction in PSU and midcap and smallcap segments is likely to continue for a few weeks as valuations have not softened even after the recent decline.

Nifty Midcap 100 is trading at a one-year forward price-to-earnings (P/E) of 27.8 against a five-year average of 23.3, and Nifty Smallcap 100 is trading at a one-year forward P/E. 22 against the five-year average of 17.

The market breadth was weak, with 2,984 shares declining and 1,004 shares rising.

ICICI Bank fell 1.5 per cent and was the biggest contributor to the Sensex fall, followed by HDFC Bank, which fell 0.9 per cent.

Last week, the Reserve Bank of India (RBI) kept rates unchanged for the sixth consecutive meeting, indicating that interest rates may not be reduced anytime soon.

Although rates were largely expected to be kept unchanged, the RBI’s decision to maintain the “accommodation retreat” disappointed investors who were expecting the central bank to change its stance to neutral with an initial rate cut. Will reverse the move.

first published: February 12 2024 | 8:19 pm Is

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