Why Midcap Stocks Are Falling

There is no stopping the rally in midcap and smallcap stocks. The broader markets have been consistently hitting new peaks, recently massively outperforming the benchmark indices.

In the early morning of 12 September 2023, both the midcap and smallcap indices achieved remarkable milestones, with the midcap index hitting a fresh record high of 33,245.85 and the smallcap index reaching an impressive 38,769.33.

However, this remarkable run took an unexpected turn on Tuesday when the BSE Smallcap index tumbled by nearly 4%, and the BSE Midcap index saw a substantial 3% decline.

This sudden shift in fortune marked a significant setback for midcap stocks, where 90% of these stocks closed lower. This downturn is one of the most substantial declines witnessed in 2023.

Here's why midcap stocks are falling.

#1 Profit Booking

The Nifty Midcap and BSE Midcap indices have surged almost 28% and 26%, respectively, in 2023 so far as against a 10% jump in Nifty and BSE Sensex.

These indices have outperformed benchmark indices for the 7th straight month in September.

From its 52-week low of 29,200.2, hit in March 2023, the midcap index has surged around 43%.

The midcap index has been positive in six of the nine months this year. It was in the red in the first three months of the year. It rose the most in May, gaining 6.2% and shed the most in January, down 2.6%.

This resurgence in mid-cap stocks came after a correction earlier in the year, making broader market stocks more attractively valued, sparking increased investor interest.

It's worth noting that midcaps have a historical track record of consistently outperforming benchmark indices, and the recent significant outperformance is a rebound from the extreme underperformance witnessed from 2018 to 2022.

The upside was on the back of a rise in inflows from all corners, including FIIs, DIIS, and retail investors.

However, as the recent rally progressed, the valuation gap between midcap and large-cap stocks narrowed, and earnings growth was largely factored into prices.

As a result, investors opted to book profits, causing a temporary decline in the midcap index. This move was driven by the perception that the stocks had reached their peak levels and concerns about their valuation.

#2 Negative Global Cues

The global sentiment in the market on 12 September 2023 was mostly negative. The S&P 500 index recorded a 1.6% decline, while the Nasdaq Composite index closed down by 2.1%.

This sell-off was primarily fueled by apprehensions about escalating inflation and the looming possibility of a recession. Investors also expressed concerns about the ongoing Ukraine conflict and its potential repercussions on the worldwide economy.

The Shanghai Composite index in China experienced a modest dip of 0.18%, and the Hang Seng index in Hong Kong saw a 0.13% decrease.

The decline in the Chinese market was attributed to a significant sell-off within the real estate sector, sparked by uncertainties surrounding the financial stability of certain Chinese real estate developers.

In addition, a weak monsoon season and a substantial surge in crude oil prices exerted additional downward pressure on market sentiment, ultimately contributing to the decline in the midcap index.

#3 Fund Liquidation Rumors

Recently, rumours have been circulating regarding a possible liquidation of a proprietary portfolio by a hedge fund. This liquidation is said to be linked to the departure of the portfolio managers under questionable circumstances, though these claims remain unconfirmed and speculative.

However, as of the latest provisional data from last evening, there are no apparent signs of such significant market disruption or cause for concern.

Additional rumours are suggesting that a prominent foreign fund is also in the process of liquidating substantial positions, contributing to negative sentiment in the market.

To Conclude

Mid-cap stocks are often seen as having more growth potential than large-cap stocks. It is because of their status as newer and more innovative companies that are still in the process of expanding their operations.

Given the healthy pace of the Indian economy, best mid-cap stocks benefit from a favourable environment, as they tend to have closer ties to the domestic economy.

However, it's essential to acknowledge the flip side of investing in mid-cap stocks. They typically exhibit higher volatility than large-cap stocks, making them less suitable for risk-averse investors.

Also, midcaps may have limited resources compared to large corporations, impacting their ability to withstand economic downturns or compete effectively against more substantial competitors.

Investing in mid-cap stocks can be a rewarding strategy for investors seeking growth opportunities.

However, it comes with higher volatility and risks. It's essential to conduct thorough research, diversify your portfolio, and consider your risk tolerance before investing in midcap stocks.

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