Global markets experienced significant losses at the beginning of this week as risk-off sentiment intensified. The major factors driving this decline included fears of a recession, concerns over tech valuations, rising tensions in the Middle East, and the rapid unwind of yen-funded trades, leading to one of the largest sell-offs in global markets in recent years.
Markets from London to Tokyo fell significantly, eroding the wealth of millions of investors. Indian markets also participated in the global sell-off, causing frontline indices to record their biggest intraday fall in two months.
However, unlike the Nikkei and other major indices such as the S&P 500 and Nasdaq, the Indian markets did not enter correction mode. It was the small-cap stocks that suffered the most in the recent sell-off.
High retail investor participation in small-cap stocks through mutual funds had driven their valuations to elevated levels. Despite valuation concerns, investors continued to invest in these stocks. Since June 2022, the Nifty Smallcap 100 has maintained a strong upward trend, weathering global uncertainties.
However, recession fears prompted investors to pull out their money, leading the index to correct by over 7%. The index hit a record high of 19,251 points on July 31. In the following four sessions, the index corrected 1,380 points, or 7.16%, to 17,871 points.
Among individual stocks, Computer Age Management Services saw the largest correction, dropping 20% in just a week. Following closely, Birlasoft, Shree Renuka Sugars, Titagarh Rail Systems, JBM Auto, Apar Industries, NLC India, and Cochin Shipyard are currently down over 15% in a week.
Other stocks, such as NCC, Sonata Software, Swan Energy, Hindustan Copper, NALCO, Data Patterns (India), KEC International, IOB, NBCC (India), Redington, Tanla Platforms, HFCL, Amara Raja, Ircon International, UCO Bank, CDSL, and 25 others, are currently down between 10% and 15% in a week.
Notably, during Monday's sell-off, all 100 constituents of the index ended the session in the red. Similarly, mid-cap stocks also witnessed significant sell-offs, with the Nifty Midcap 100 index down 6.4% in just four sessions.
Analysts pointed out that small- and mid-cap stocks had already rallied significantly in terms of valuations, causing them to fall more than the benchmarks. Additionally, retail investors, who tend to engage in more short-term trades, form a larger part of the small- and mid-cap market compared to benchmark stocks.
Recession fears were triggered when last Friday’s U.S. jobs report for July showed a rise in the unemployment rate to 4.3% from 4.1% and much weaker-than-expected monthly job creation. Those fears have exacerbated a global risk-asset sell-off that began last month, driven by concerns over tech valuations and heightened geopolitical risks.
Another exacerbating factor? A stronger yen is now up about 14% from its 38-year low against the U.S. dollar hit last month. That has led to the rapid unwinding of carry trades, or positions funded by using low-yielding yen to buy higher-yielding currencies and other assets.
BlackRock, an American multinational investment management corporation, believes the July U.S. jobs report indicates a slowdown rather than a recession. The unemployment rate is rising, but unlike past recessions, the main driver is an immigration-driven increase in labor supply rather than layoffs. Job creation is slowing but has averaged a robust 170,000 over the past three months, according to BlackRock.
Consumer spending, while cooling, remains relatively healthy, and Q2 corporate earnings have so far exceeded expectations. BlackRock cited LSEG Datastream data, noting that S&P 500 earnings growth is projected at about 13%, above the 9% expected at the start of the season.
BlackRock anticipates that risk assets can recover as recession fears ease and the rapid unwinding of carry trades stabilises. The firm maintains an ‘overweight’ position in U.S. equities, driven by the AI mega force, and views the sell-off as presenting buying opportunities. BlackRock believes growth will be supportive of risk assets and that markets are pricing in too many Fed rate cuts.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
