Retail sees red as smids lose ₹26 trillion in three weeks

Mumbai: Investors pumping in money into stocks of small- and mid-sized companies or smids have seen their wealth erode by a staggering ₹26 trillion since 20 September, when the market capitalisation of the relevant indices hit record highs.

Comparatively, provisional data from the BSE shows that the top 10 companies by market capitalisation have cumulatively seen erosion of ₹5.58 trillion over the same period. These companies’ market cap comprises more than a fifth of the entire listed universe, underscoring the underperformance of smids versus their large-cap peers.

“It shows how the small investor, who typically invests in smids, has bled from the correction over the past three weeks,” said G. Chokkalingam, managing director of Sebi-registered research firm Equinomics, adding that he expects the weakness to persist for a "few weeks to a couple of months until a bottom is formed”, while remaining bullish on the long term “structural” story.

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The market cap of the BSE Midcap Index, comprising 132 stocks, has fallen ₹11.06 trillion from a high of ₹81.58 trillion on 20 September to ₹70.52 trillion on Tuesday. The BSE Smallcap Index, comprising 946 scrips, has seen wealth erosion of ₹14.95 trillion from a high of ₹91.51 trillion to ₹76.56 trillion.

Comparatively, the BSE Sensex’s market cap fell ₹9 trillion from ₹167.49 trillion to ₹158.38 trillion over the same period

On Tuesday, smid counters fell the most in two and a half months. The BSE Smallcap index fell by 3.8% to 53,530.92 and the BSE Midcap Index tanked 2.52% to 45,974.31.

What’s behind the fall

This fall reinforced experts’ belief that the negative market sentiment has been driven by a confluence of factors like sluggish macroeconomic indicators, FPI (foreign portfolio investor) outflows amid rising bond yields and presidential elections in the US, the Middle East conflict, and tepid earnings growth.

Nilesh Shah, managing director of Kotak Mahindra AMC, pointed to recent macro data that he said has increased market uncertainty.

“GST collections in September (6.5% y-o-y) grew below the nominal GDP, exports are hit by rising container freight rates, and record high passenger vehicle inventories (almost 800,000) are pointing to sluggish demand,” Shah said.

“To top that, FPI outflows from India have intensified ahead of the US presidential elections and amid rising bond yields in the US on strong jobs growth, which could slow the pace of rate cuts by the Fed. Earnings growth in Q2 also is showing that valuations have run well ahead of fundamentals in certain small- and mid-cap counters,” he added.

These factors have affected smids more, which typically outperform large caps in a rally and underperform during a pullback or a correction.

Veteran investor Shankar Sharma said that the fifth year of a bull market normally witnesses a “breather” and that was what investors are experiencing now.

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“Retail should avoid smids, which have fallen sharply, and look to deploy funds in those scrips whose fall has been more gradual,” Sharma said.

The prevailing negative sentiment was reflected by Hyundai listing at a discount of 1.5% to its issue price of ₹1,960 and closing down 7.12 % at ₹1,820.40 on Tuesday. Then, shares of food delivery company Zomato fell 3.6% to ₹256.2 after the company 's Q2 PAT (profit after tax) of ₹176 crore missed Street expectations.

FPI selling

FPIs have sold ₹72,136 crore this month through 21 October, the highest outflows in any month so far. On Tuesday, provisional FPI sales stood at ₹3,978.61 crore while DIIs (domestic institutional investors) purchased a provisional ₹5,869 crore.

The NSE figure on retail client sales was unavailable at press time, but heightened sales by FPIs in index futures—by 3,102 contracts—and long liquidation by retail /HNI (10,841 contracts closed out) caused investor wealth to decline by ₹9 trillion.

The Sensex on Tuesday

On Tuesday, the Sensex fell 1.15% to 80,220.72 and the Nifty declined 1.25% to 24,472.10. The advance-decline ratio on BSE stood at 0.14. Twenty-nine stocks on the Sensex fell, and only one (ICICI Bank) rose.

The biggest drags on the Sensex were Reliance Industries, HDFC Bank, Mahindra & Mahindra, State Bank of India and L&T, which contributed to over half of the index's 930-point fall.

A pullback is characterised by a 5-10% fall from highs while a correction happens below 10-20% from high, and a bear market below 20%.

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