Small cap stocks: Bear markets typically display irregular patterns, with temporary upswings often preceding additional downturns. (AI image)
Smallcap stocks
have demonstrated a remarkable recovery, with a ₹4 lakh crore increase in value over four days. The
BSE Smallcap index
has recorded a 6.6% increase, sparking optimism amongst investors.
However, an ET analysis cautions that bear markets typically display irregular patterns, with temporary upswings often preceding additional downturns. The situation remains uncertain, as approximately 50% of smallcap stocks remain 40% below their highest values, whilst the index sits 21% lower than its December peak, the analysis notes. The crucial consideration is whether this represents a sustainable recovery or merely a temporary uplift in a prolonged W-shaped market pattern.
Notable performances include Bharat Wire Ropes with a 34% increase, whilst Triveni Turbine, Jyoti CNC Automation, and Ramco Systems each achieved gains exceeding 20%. During the previous four trading sessions, the BSE Smallcap index constituents, comprising 938 stocks, accumulated ₹4.16 lakh crore in market capitalisation, significantly outperforming the Sensex, according to ACE Equity data quoted by ET.
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Nevertheless, more than 600 stocks continue to show significant losses, with values diminished by over one-third, indicating persistent effects of the recent market correction.
The current situation presents a critical decision point for investors, as market analysts evaluate whether this upward trend represents a genuine recovery or a temporary surge, requiring careful consideration between active participation and cautious observation.
Small Caps Warning: Valuations Remain Elevated
The recent decline in smallcaps has not sufficiently reduced their high valuations. Current data shows the Nifty50 trading 9% under its long-term average, whilst mid- and small-cap indices continue to trade 22% and 25% above their respective averages, as reported by brokerage Motilal Oswal.
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According to Capitalmind’s Krishna Appala, despite recent corrections, small and midcap valuations continue to be high, with smallcap P/E ratios at 33x compared to their 20x historical average. The market’s health appears concerning, as merely 10% of Nifty 500 stocks trade above their 200DMA, indicating a complete market adjustment could be prolonged.
He indicates that future market performance will be determined by earnings growth and overall market confidence.
“While largecaps appear better placed, the broader market may consolidate unless earnings growth picks up. Strong inflows into smallcaps in recent years have elevated valuations, making them more vulnerable to corrections if earnings do not keep pace. With volatility still low and markets not yet at full capitulation, a measured approach remains prudent—staggered largecap allocations, selective midcap exposure, and caution in smallcaps until earnings visibility improves. Market sentiment remains fragile, and further upside may require stronger fundamental support to sustain.”
According to Rupak De, Senior Technical Analyst at LKP Securities, the market shows potential for additional gains.
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“This smallcap rally could have more steam left in it. I wouldn’t be surprised if we see the BSE Smallcap index heading towards 47,500–48,000 in the short term.”
Whilst acknowledging possible recovery, Axis Securities’ Rajesh Palviya emphasises the need for vigilance.
“We may see some more recovery in the midcap and smallcap space but one needs to be cautious till Nifty is holding above 22,400. One can try to buy some stocks where oversold trajectory is already there. There would be some opportunity on the trading side. But the structure is weak for Nifty midcap as well as for the smallcap,” he said.
Are Largecaps Better Positioned? A Two-Stage Recovery Expected
Market experts suggest largecaps offer more stability in current conditions. Independent market advisor Sandip Sabharwal anticipates a sequential recovery pattern.
“The significant sell-off over the last few months has overall taken the market somewhat below its fair value. And although there are pockets of excess still in some small and midcap segments, many strongly performing companies on the small and midcap side also have come into good value zone. So, the first phase of the rally could be led by largecaps and then stabilise and then small and midcaps can join in,” he said.
Samco’s Jimeet Modi cautions investors about indiscriminate smallcap investments. “While smallcap stocks may look attractive after a sharp correction, not all beaten-down stocks offer value. Many smallcap companies with weak financials, fragile business models, or poor management quality may continue to struggle even in a market rebound,” he said.
Considering the attractive valuations and stability of
largecap stocks
, Modi advises prioritising fundamentally robust largecaps over weaker smallcaps in the present market conditions. He suggests that investors uncomfortable with direct equity exposure should consider largecap mutual funds, which provide diversified, professional management to capitalise on potential largecap growth.
The ratio between smallcap and largecap indices has recovered from its lowest point, indicating a possible movement towards largecaps. As largecap valuations appear more reasonable now, analysts recommend favouring them for balanced returns.
Given the market uncertainty, the current rally might face fluctuations. Investors should maintain selectivity and prudence, emphasising quality rather than momentum, particularly as smallcaps remain susceptible to significant downturns.
Disclaimer: The opinions, analyses and recommendations expressed herein are those of brokerages and analysts and do not reflect the views of The Times of India. Always consult with a qualified investment advisor or financial planner before making any investment decisions.
