Broader markets witness fresh turbulence amid Israel-Hamas conflict- QHN

Stocks in the broader markets witnessed fresh turbulence amid growing headwinds such as rising US bond yields, oil prices and geopolitical uncertainty.
 

The Nifty Smallcap 100 index dropped nearly 2 per cent, while the Nifty Midcap 100 index fell 1.3 per cent.
 

Both underperformed the benchmark Nifty, which fell 0.72 per cent.
 

This was the worst fall for the smallcap index since September 12, when it had tanked over 4 per cent.
 

Lately, brokerages have been sounding caution over stocks in the small and midcap space following a surge from their lows in March.
 

Last week, Citi said it had narrowed the list of preferred midcap stocks, citing stretched valuations. Their fundamentals are “unchanged” but valuations are at a premium compared to larger stocks, it said.
 

The brokerage said disproportionate inflows into small and mid-caps probably contributed to the strong out-performance.
 

Kotak Institutional Equities, in a note on Monday, told its clients to rotate small and midcaps stocks with largecaps. “We see better investment opportunities and reward-risk balance in the top largecap names than in other parts of the market. We expect the largecap laggards of 2022-23 to do better over the next 6-12 months. Other largecap and quality midcap stocks may see a period of time correction.
 

Narrative-based mid and smallcap stocks will eventually see large price or lengthy period of time correction,” it said.

In the past six months, the Nifty Smallcap 10 and the Nifty Midcap have gained 37 per cent and 31 per cent, respectively. By comparison, the Nifty 50 index is up 11 per cent.
 

“With the strong catch-up by Midcaps and smallcaps in the last couple of months, we believe that the margin of safety at current levels in certain pockets has reduced as compared to Largecaps. Keeping this in view, the broader market may see some time correction in the near term and flows will likely shift to Largecaps,” said a note by Axis Securities.

 

Given the lucrative returns generated by stocks in the boarder universe, retail investors have been aggressively chasing this space. This is evident from the surge in mutual fund inflows into small and midcaps schemes. While the returns delivered by small and midcap MFs have been eye-catching this year, late entrants to the party may not have it that easy.
 

“We do not find much value in most of our midcaps and smallcaps,” the Kotak note added, warning of potential draw downs, going ahead.
 

On Monday, out of the 3,929 stocks traded on the BSE, 2,804 ended with losses, 993 gained and 132 remained unchanged.

The rising tensions in the Middle East has added to geopolitical uncertainty for the markets. High oil prices may impact margins of smaller companies more, warn analysts. Also, in an event of a correction in the market, the broader markets may tank more. This trend was seen playing out on Monday.
 

“If oil prices rise sharply from here, investors will take risk off the table and go to safe-haven assets, with the US dollar, yen and government bonds, yielding returns better than equities. Asia is affected by oil prices. If the Israeli–Palestinian conflict doesn’t escalate, the results season comes back into play, but if it escalates, we might see moves in individual companies, but foreign investors will continue to take risk off,” said Andrew Holland, CEO of Avendus Capital Alternate Strategies.