Selloff in smallcap, midcap shares: What's behind this panic selling?

Domestic benchmarks continued their losing run for the eighth consecutive trading session on Friday as all sectoral indices dragged. The pain was much deeper in the broader market as Nifty Smallcap 100 and Nifty Midcap 100 tumbled 3.55 per cent and 2.41 per cent, respectively.

Market experts largely suggested that there could be further selling in the select space as valuation comfort is still missing. "The valuation comfort is still missing in small- and midcap stocks despite the recent correction. The key reason for this panic selling was a lot of MTF (Margin Trading Funding) books built up in the market since Covid. The drawdowns we've seen in the last two months were that the margin calls getting triggered but somehow investors were fulfilling those calls," Manish Chowdhary from StoxBox told Business Today.

"We are now at a point where further funding to those margin calls are becoming increasingly difficult. Hence, we are witnessing such kind of panic selling in the mid- and smallcap space," Chowdhary added.

There are inherent risks in the broader market, said Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, adding that small- and mid-caps stocks are high-beta in nature.

"They tend to outperform well in a bullish market and underperform in a contrast scenario. As the market is in a corrective phase, we are witnessing high volatility in these counters. Those who have invested in small- and midcaps need to understand that there are inherent risks in the broader market. If a stock has strong fundamental and earnings visibility then there is nothing to worry about. If a stock has a frothy valuation, it is going to get punished whenever this kind of correction happen," he further stated.

"This is the first time since 2020 that we are seeing one big round of supply (selling) in mid- and smallcap stocks. This supply has the potential to change the demand-supply equation of market on the negative side for a longer time," analysts at Elara Securities warned.

Data showed one out of every three BSE smallcap index constituents have revisited their one-year lows in February itself. Despite the recent fall, the BSE Smallcap index now trades at 28 times trailing 12-month EPS against Sensex's 21 times.