Falling up to 13 per cent this year so far, BSE smallcap and midcap stocks have lagged behind the benchmark Sensex as experts said these indices had climbed more than the frontline index during the "good times" and a deeper correction is natural in the current turbulent times.
Equity markets have faced many headwinds this year with the emergence of geopolitical tensions, inflation concerns and unabated selling by foreign funds.
Experts said that there has been nervousness across the capital markets both domestic and globally mainly driven by these challenges.
The BSE smallcap index has tumbled 3,816.95 points or 12.95 per cent this year so far while the midcap gauge fell by 2,314.51 points or 9.26 per cent. In comparison, the 30-share BSE Sensex declined by 3,771.98 points or 6.47 per cent this year.
"The mid and smallcap indices had also gone up a lot more than the Sensex during good times so it is only natural that they will fall more than the Sensex during bad times. Rise and fall in mid and smallcaps tend to be more pronounced than their largecap counterparts," said Rahul Shah, Co Head of Research, Equitymaster.
He further said as far as the current trend is concerned, while the markets are no longer expensive, they aren't cheap either.
"This is a market where quality and growth will be rewarded and expensive valuations and bad quality will be rejected," Shah added.
The BSE smallcap gauge hit its 52-week low of 23,261.39 on June 20 this year. It had reached its one-year peak of 31,304.44 on January 18.
The midcap index fell to its 52-week low of 20,814.22 on June 20. It climbed to its one-year high of 27,246.34 on October 19 last year.
The Sensex hit its 52-week low of 50,921.22 on June 17 this year. The benchmark hit its one-year high of 62,245.43 on October 19, 2021.
"Over the last six months there has been a bit of nervousness across the capital markets both globally and domestic markets and clearly this nervousness has been driven by challenges on the economic front, geopolitical tensions, high inflationary environment, higher interest rates, intensive foreign institutional investor selling.
"So, in the face of it does look like midcaps & smallcaps have underperformed but we have to also keep in mind that midcaps & smallcaps have been significantly outperforming in the last two years plus," said Sachin Shah, Fund Manager, Emkay Investment Managers Limited.
Small stocks put up a stellar show in 2021 giving returns of 63 per cent amid a dream run in the equity market.
In 2021, the midcap index gained 7,028.65 points or 39.17 per cent while the smallcap index zoomed 11,359.65 points or 62.76 per cent. In comparison, the Sensex jumped 10,502.49 points or 21.99 per cent last year.
The Sensex had gained 15.7 per cent in year 2020. Small and midcap stocks had gained up to 24.30 per cent in 2020.
According to market analysts, small stocks are generally bought by local investors, while overseas investors focus on blue-chips.
"We are in a correction phase since October 2021 or we can say that a short-term bear phase and generally, midcap and smallcaps tend to witness large moves on both sides compared to frontline stocks.
"Inflation is a key trigger for the correction in the market and we know that large companies are better placed to pass on higher input costs while midcap and smallcap companies have to take a hit on their margins which is another reason for their underperformance," Sunil Nyati, Managing Director at Swastika Investmart Ltd, said.
Indian markets remained resilient despite lots of headwinds and record selling by FIIs (Foreign Institutional Investors) thanks to domestic money, Nyati added.
"Going forward, all eyes will be on quarterly results as they will be the real indicator of the health of India Inc. If quarterly results come out better-than-expected then we could see some buoyancy otherwise markets may continue to remain range-bound with select pockets doing well while others may feel the pressure," Rahul Shah added.
As per Nyati, it seems that worst is behind us in terms of inflation therefore we can expect an upmove in the Indian equity market from here.
"If FIIs come back in the market then we can expect outperformance by largecap stocks in the near term however over the long period midcap and smallcap stocks tend to outperform as we are in a long-term bull market," he added.