Stock market: Stay invested; avoid slogging in mid & smallcap shares ahead of key events

After a crushing defeat in Border-Gavaskar Test series earlier this month, India is set to take on England on its home turf in the third T-20 later today. The shortest form of game allows players to take adventure, but the upcoming events on Dalal Street alarm investors to stay cautious and avoid misadventures from destroying their wealth.

Ahead of key events like US Fed's policy on January 28-30; expiry of monthly F&O contracts for January 2025 series; Union Budget on Saturday, February 1; Delhi Elections on Wednesday, February 5; RBI's monetary Policy on February 7; and Delhi Election results on February 8 may lead to more bouts of volatility in markets.

Amid the ongoing and upcoming volatility in the Indian stock markets, analysts are suggesting investors to stay invested on the pitch with quality names and avoid slogging in the market. Market participants continue to remain bullish on the market for a long term, but suggest to stick with safe counters instead of falling knives.

Kranthi Bathini, Director of Equity Strategy at Wealthmills Securities said that an investor should not be out in the current scenario. Staying on the pitch, that means, staying invested is the key. "Every game, every pitch has a different nature, condition and strategy, so is investment. But staying on the field is utmost important in tough & turbulent times."

The current sentiment of the market is turning negative from neutral. However, long term investors with one to three years of horizon can allocate funds in the stock with higher margins of safety. Investors should focus on growth stocks, instead of chasing the momentum. Value in the stock markets shall emerge if there is a severe correction in the market from current levels, Bathini said.

Recovering from the previous sessions jitters, BSE Sensex rose more than 600 points on Tuesday, reclaiming the 76,000 mark. The Nifty50 index also soared close to 160 points, just shy of 23,000-levels during the day. However, broader markets continued to face the wrath of selloff with volatility spiking higher.

BSE smallcap index crumbled another 4 per cent on Tuesday, correcting nearly 20 per cent from its 52-week highs. Similarly, BSE midcap index was down by 2 per cent for the day, reflecting an 18 per cent fall from its 52-week high. Fear gauge has been spiking higher by 2 per cent to 18.50 mark, signaling jittered sentiments of market investors.

The market is being impacted by two sets of factors- external and internal. Externally, the strong dollar and high US bond yields have triggered selling in emerging markets. Internally, the dip in India’s Q2 GDP growth rate and the ongoing downturn in corporate earnings have impacted sentiments, said Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services

"The FII selling has been facilitated by the excessive valuations in India.  The market correction has made the largecap valuations reasonable. The mid and smallcaps are even now overvalued and, therefore, can correct further.  Investors should remain calm during this turbulence. Buying largecaps in financials, IT and pharma would be a good investment strategy," said VK Vijaykumar.

The broader stock market selloff on Monday wiped Rs 9 lakh crore off BSE market capitalisation (m-cap) and about Rs 5 lakh crore on Tuesday. This sell-off has eroded investor wealth by Rs 36 lakh crore in January so far. The selloff was led by small and midcap stocks, cautioning investors over any misadventure.

The Budget is due this week. This, combined with uncertainty of tariffs, with the Republican party in the US, have created an uncertain environment, said Aniruddha Naha, CIO, Alternatives, PGIM India AMC. Investors' confidence and patience will get tested in the next 3 months, he said.

"Corporate India's balance sheet is strong and the recovery in earnings should start reflecting in the next two quarters. Valuations have corrected decently. With a trough in earnings in the next two quarters, investors could build portfolios over the next three to six months, for long term wealth creation," Naha added.