The mid- and small-cap stocks have had a terrible start to 2025, as both indexes have underperformed the benchmark Nifty50 so far in the calendar year 2025 (CY25). And there isn't going to be any relief anytime soon, if analysts are to be believed.
The Nifty Smallcap 250 index has dropped about 9% so far in CY25, compared to about 7% for the Nifty Midcap 150 index. According to data, the Nifty 50 index has decreased by almost 2% during this time. Overall, 280 of the 400 stocks that make up the index (or 70%) are trading below their corresponding 200-day moving average (DMA).
"There are two market trends that are worth mentioning. First, there is a steady pattern in institutional activity: FIIs are selling and DIIs are buying. Second, a trend towards quality is evident; large-cap stocks are holding up well even as the overall market is contracting. In the near future, these two trends are probably going to continue. FIIs are unlikely to become buyers anytime soon because the dollar index and US bond yields are still high," stated V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Following years of outperformance, mid- and small-cap stocks have begun to decline. According to a note from BNP Paribas Securities, the last time these two indexes saw a decline on a calendar year basis was in CY19, when the Nifty Midcap 100 and the Nifty Smallcap 100 lost 4% and 10%, respectively.
According to BNP Paribas, the phenomenal ascent of mid- and small-cap stocks since then has resulted in high valuations in comparison to their large-cap counterparts. They therefore believe that large-cap stocks offer better value and favor them over mid- and small-cap stocks in CY25.
"Strong DII inflows were a major factor in the mid- and small-caps' superior performance over the Nifty 50 in CY24. Since January 2023, mid- and small-cap stocks have performed well, which has raised their valuation premiums over the Nifty 50. According to Kunal Vora, head of India equity research at BNP Paribas Securities, the Nifty Midcap next twelve months (NTM) price-to-earnings (P/E) is currently trading at a premium of about 58% over the Nifty 50 NTM P/E.
Meanwhile, 109 stocks (72 percent) of the 150 stocks that make up the Nifty Midcap 150 index are currently trading below their respective 200-day moving averages (DMAs) as of the beginning of CY25. However, data indicates that 171 stocks, or 68% of the Nifty Smallcap 250 index, are trading below their respective 200-DMA.
Kalyan Jewellers India, Kaynes Technology, Aditya Birla Real Estate, KEC International, Oracle Financial Services Software, Oberoi Realty, and PB Fintech are among the individual stocks that have been hardest hit in CY25, dropping as much as 37% during this time, according to data from ACE Equity.
Some of the stocks that defied the trend in CY25 and rose to 20% include Vodafone Idea, SBI Cards and Payment Services, Navin Fluorine International, SRF, Shyam Metalics and Energy, Redington, and Sundaram Finance.
"Due to negative global cues, rising oil prices, recent value erosion in numerous individual stocks, and the resulting liquidity crunch, many high-quality small- and midcap stocks have experienced significant corrections, and the pain may last until mid-March. Those who can bear the risk of another 5% to 7% drop in the index level may continue to hold on to quality small- and mid-cap stocks, and even add more such quality stocks on each decline until the end of March 2024," said G Chokkalingam, Founder and Head of Research at Equinomics Research.
