“We are not sure if the correction marks a reversal of the market to fundamentals and numbers from sentiment and narratives,” said Kotak’s analysts including Sanjeev Prasad in a client note.
Till Wednesday, the sharp selloff in mid-cap and small-cap stocks resulted in 50 stocks with market capitalization exceeding ₹500 crore tumbling between 25% and 65% in March so far. Around 130 stocks slumped 20% to 25% in this period. Mid-cap and small-cap stocks, however, rebounded on Thursday in a relief rally.
Kotak said the recent correction in broader markets is quite small in the context of the large returns of the past year. “We note that 61% of mid-cap. and 63% of small-cap. stocks have given more than 30% return in the past year even as the bulk of the mid-cap and small-cap stocks have given negative returns in the past one month,” said the firm’s analysts.
The brokerage said valuations of the majority of the mid- and small-cap stocks are ‘quite expensive’.
Kotak said high return expectations and strong returns in the past three years may have reinforced their direct participation in mid- and small-cap stocks. “We are not sure if there will be any change in the investment behaviour and optimistic view of non-institutional investors as a result of the recent correction and cautionary statements of the regulator,” they said.
