A wave of uncertainty has washed over smallcap stocks, with 55 shares hitting fresh 52-week lows amidst a broader market downturn. The second-tier stocks seemed to have lost their luster as moderating earnings growth fails to justify the high valuation premiums they once enjoyed over their largecap counterparts. This shift in the market landscape has prompted seasoned investors like S Naren of ICICI Prudential to urge caution and consider pulling out of small and midcaps entirely.
The BSE Smallcap index has taken a beating in 2025, plunging 16% compared to a mere 3% drop in the largecap benchmark Sensex. This stark discrepancy in performance has led to concerns about a potential retail selloff, as the 12-month trailing returns for smallcaps have dwindled and shorter-term returns have turned negative. The market is experiencing a significant supply surge in mid and small cap stocks, with breadth indicators pointing towards a potentially prolonged period of negative market sentiment, as Elara Securities noted.
Despite the recent downturn, the BSE Smallcap index is trading at 28 times trailing 12-month EPS, significantly higher than the Sensex’s 21.43 times. A notable portion of the index constituents have revisited their one-year lows in February alone, indicating a widespread decline in smallcap stocks. Companies like Kamdhenu Ventures Ltd, Dish TV India Ltd, and Sterling and Wilson Renewable Energy Ltd have seen their market values plummet by 75-80% from their 52-week highs, with many others experiencing similar downturns.
As the pressure mounts on smallcap stocks, questions arise about the resilience of retail investors who have been investing at higher market levels. Kotak Institutional Equities raised concerns about the disparity between retail investor returns and SMID indices, suggesting that the breaking point for investors may be closer than expected. Despite these challenges, mutual fund industry data shows that retail investors continued to pour funds into smallcaps as recently as January, indicating a growing risk appetite among investors.
While some experts remain cautious about the smallcap segment, not everyone is bearish on its prospects. Pawan Bharaddia, Co-founder at Equitree Capital, noted that historical data suggests small-cap corrections typically play out over 8-12 weeks before stabilizing. With midcaps in India potentially entering the final phase of this correction, valuations for smallcaps are becoming increasingly attractive. Amidst the uncertainty, it remains crucial for investors to seek advice from qualified financial advisors before making any investment decisions.
In conclusion, the smallcap market is experiencing a period of turbulence, with stocks hitting new lows and valuations under intense pressure. Retail investors face a challenging environment as market dynamics shift, prompting a reevaluation of investment strategies. As experts weigh in on the future of smallcaps, caution and careful consideration are paramount to navigate these uncertain times.
