Smallcap shares enter bearish phase; will the bloodbath continue?

Indian equity markets have been under significant strain this year, weighed down by multiple factors, including persistent foreign capital outflows, lacklustre corporate earnings, and the rupee hitting record lows against the dollar. Investor sentiment has been further soured by U.S. President Donald Trump's imposition of new tariffs, reigniting fears of a potential trade war. Such tensions could dampen global economic growth, fuel inflationary pressures, and exacerbate uncertainties for the Indian market in the coming months.

The pain is much deeper in the smallcap space, which had become the darling of investors, outperforming the benchmarks. Data from the National Stock Exchange (NSE) showed that the Nifty Smallcap 100 index has corrected 23% from its record high of 19,716.20, and the bigger Nifty Smallcap 250 index has crashed 24% from its record high of 18,688.30 in December last year.

A stock or an index entering a bearish is confirmed when it falls over 20% from its recent peak.

Analysts point to the exaggerated valuations in the smallcap space, which is causing a massive correction in this space. The carnage in smallcap space is such that out of 250 shares in the Nifty Smallcap 250 index, only 30 shares are trading with a positive bias in the last three months, as per NSE data.

A dismal set of earnings posted by companies in smallcap space amid hopes of high expectations amid surging valuations is a major reason for the drawdown in this space. As per reports, earnings of smallcap companies dropped by 18% at the end of the December quarter. This was mainly due to a slowdown in government capital expenditure spending in the first half of the current financial year owing to general elections.

“There are stocks in the smallcap space that had shown a massive surge and in the ongoing correction they have dropped around 40% from their highs, but for them to reach the levels seen at record highs will not be possible any time soon,” market veteran AK Prabhakar said.

He added that many PSU bank stocks are still trading below the highs they made in 2010.