Stock market crash: Mayhem in smallcap and midcap stocks! What should investors do? – The Times of India

Stock market crash: Smallcap and midcap stocks have experienced their most severe decline since the March 2020 Covid market downturn, causing significant losses for retail investors. In February, widespread selling affected the broader market severely, with the BSE Smallcap index declining 14%—marking its first double-digit monthly reduction since the pandemic—whilst the Nifty Midcap 100 fell 10.8%.
According to an ET analysis, within the BSE Smallcap index comprising 938 stocks, 321 companies saw declines exceeding 20% in a single month. Notable casualties included Vakrangee, Zen Technologies, Oriental Rail Infra, and Suratwwala Business Group, which fell between 40% and 66%. The situation appears particularly severe, with 243 smallcap companies now trading at less than half their 52-week peak values.
The Nifty Midcap 100 descended to its lowest point since March 27, 2024, whilst the Nifty Smallcap 100 dropped 3% to reach its lowest close since March 19, 2024, the ET report said. Investors’ confidence continues to deteriorate amidst persistent selling, unfavourable global indicators, political uncertainty, and concerns about liquidity in smaller capitalisation stocks.

BSE Small Cap Stocks

Pratik Gupta of Kotak Institutional Equities maintains a cautious stance regarding small and midcap valuations. “We remain cautious on the outlook for small/mid-caps in general due to expensive valuations in many cases. We have been negative for a while, and despite the correction, we do not believe the valuations have come down enough.”
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Gupta identified several key concerns, including potential severe global economic deceleration, reduced agricultural income due to poor monsoons affecting construction, and decreased domestic retail investment in equities. “Most local MF, insurance, and PMS funds are seeing a slowdown in their equity inflows, but overall net inflows continue. The nature of flows has, however, shifted from small/midcaps or thematic/sectoral funds to large-cap or balanced debt-equity funds,” he observed.
Sudeep Shah, Deputy Vice President and Head of Technical & Derivatives Research at SBI Securities, noted significant technical deterioration in both indices. “The Nifty Midcap 100 has slipped below its 100-week EMA for the first time since August 2020, while the Nifty Smallcap 100 has been trading below its 100-week EMA for the last three weeks. The 14-week RSI is in bearish territory and falling, which is a negative sign.”
He outlined important price points for observation. “For the Nifty Midcap 100, the 47,200-47,000 zone will act as immediate support, while a further slide below 47,000 could open doors to 46,400. On the upside, 48,800-48,900 will be a key hurdle. Meanwhile, for the Nifty Smallcap 100, support is placed at 14,200-14,100, which aligns with the 50% Fibonacci retracement of its prior rally from 8,682 to 19,716. Resistance is at 15,100-15,200.”
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Rajkumar Singhal, CEO of Quest Investment Advisors, observed that disappointing earnings have significantly affected small and midcap sectors. “Smallcap valuations remain above long-term averages, and earnings downgrades have exacerbated the sell-off. With earnings likely to recover in CY25, the pain in small and midcaps may ease, but a selective, bottom-up approach is key—focus on quality businesses with strong balance sheets and sustainable growth.”
Market analysts provide differing perspectives on current market conditions. Dharmesh Shah from ICICI Direct draws confidence from past market behaviour. “Over the past two decades, midcaps and smallcaps have corrected by 25-30% during bull markets before seeing a strong rebound,” he noted, whilst acknowledging the possibility of further decline whilst suggesting current levels may indicate approaching market bottom.
According to Shah’s analysis, present market valuations present opportunities in quality midcap and smallcap shares, with potential upside movement anticipated within the next quarter.
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Offering an alternative perspective, market specialist Nischal Maheshwari advocates for a selective approach towards mid and smallcap investments. “We should stick to sectors where we find comfort in valuations. If mid and smallcaps have corrected enough and you feel comfortable with the valuation, you can look at them selectively.”
Given the current international uncertainties, pre-election market volatility, and deteriorating technical indicators, investors must decide between immediate market participation or maintaining a cautious stance. The forthcoming period will prove decisive in establishing whether the current market decline stabilises or continues further downward.