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Mid & small cap stocks to correct further? Stocks still at ‘full-to-lofty’ valuations

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Small cap and mid cap stocks dive! Is the correction over?

Kotak Institutional Equities

has said that despite a recent sharp correction, most mid-cap and

small-cap stocks

are still trading at high valuations and above their fundamental values. The brokerage has expressed concerns that many low-quality stocks could experience a further decline in their share prices
In a client note, Kotak’s analysts, including Sanjeev Prasad said there is uncertainty about whether the

market correction

reflects a shift to fundamental values rather than sentiment.

In March so far, over 50 stocks with market capitalization above Rs 500 crore have plunged by 25% to 65%. Additionally, around 130 stocks have dropped by 20% to 25%.
Although mid-cap and small-cap stocks rebounded on Thursday, according to an ET report, Kotak Institutional Equities highlights that the recent market correction is relatively small compared to the substantial returns of the past year. The analysts have noted that a significant portion of these stocks had negative returns in the last month despite the high returns in the past year.
Kotak Institutional Equities stresses on the view that the majority of mid-cap and small-cap stocks are currently overvalued. The brokerage also mentioned that investors’ high return expectations and previous strong performance may have led to increased participation in these stocks.

They raised concerns about whether there would be a change in investment behavior post the recent correction and regulatory warnings.
While the recovery on Thursday was primarily driven by small-cap and

mid-cap stocks

, some analysts cautioned that the markets may not be completely out of the woods yet. The Nifty Midcap 150, Nifty Smallcap 250, and Microcap 250 indices all posted gains on Thursday, recovering from the significant losses incurred the day before.

Despite the positive movement, experts advise vigilance as a break below crucial support levels could trigger further selling. Foreign portfolio investors were net sellers, while domestic institutions remained buyers. Some analysts view the recent market correction as a normal part of a bull market cycle, anticipating potential consolidation in mid-cap and small-cap stocks in the coming months.
Looking ahead, market observers suggest that the recovery may be selective, favoring high-quality shares over riskier assets. As the market stabilizes, large-cap stocks are expected to outperform, potentially driving the Sensex and Nifty to new highs.

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