Why the fall in mid, smallcaps this year is not similar to 2018

Midcap and smallcap stocks have taken it on their chin in the past few weeks with the two indices slipping 3.3 per cent and 6.5 per cent on the NSE, respectively. The cuts in individual stocks that comprise these indexes have been much sharper. In comparison, the Nifty 50 index has been flat, albeit amid volatility.

Is the fall in the midcap and smallcap indices the start of a deeper correction as happened in 2018? Analysts at HSBC do not think so. The market correction in 2018, they believe, was led by several risk events coming together to trigger a bear phase. In 2018, concerns started when the government introduced a 10 per cent tax on long-term capital gains (LTCG) in the February 2018 budget.

Global liquidity tightening amid fears of steeper rate hike by the US Federal Reserve and rising crude prices dented external finances. Late in 2018, another round of market selloff was triggered by a domestic credit crunch in the non-bank financial companies (NBFC) space post debt default by IL&FS and gross domestic product (GDP) growth slowing down globally and in India.

All these factors triggered a sharp correction in equity markets with the midcap/smallcap indices correcting by 24 per cent and 31 per cent, respectively between January and

October 2018, shows data.

“Both periods coincide with a nearly four-year prior period of outperformance of small and midcap names over the broader market, with the bull run before the correction similar in both the contexts (smallcap four-year CAGR of around 30 per cent and midcap CAGR of nearly 27 per cent). Hence the worry as to whether similar period is ahead, and this correction is only the beginning,” wrote Herald van der Linde, head of equity strategy for Asia Pacific at HSBC, in a coauthored note with Amit Sachdeva and Anurag Dayal, referring to compound annual growth rate.

In 2024, however, HSBC analysts argue that things are different. Investors are using the current phase to buy selectively from a long-term perspective, they said. “We expect the bull market phase to still persist, but now led by largecaps which offer better valuation and benefit from FII inflows. We expect continued pressure on midcaps, but any sharp correction looks unlikely from here on,” HSBC said.

Nykaa, Equitas, Titagarh, Prestige Estates, Phoenix Mills, Ipca Labs, Voltas, and Kalyan are their top eight midcap ideas at current levels. Here are the key reasons, HSBC analysts believe, why the fall in 2024 is different from 2018 and why history may not repeat itself. GDP growth: Indian economy is on a far better and stable footing now versus 2018. The GDP growth at 6.9 per cent, HSBC said, continues to be better than the 3.9 per cent recorded in 2018. With economic momentum on its side, most analysts expect Indian equities to be on FIIS radar in the months ahead.

Liquidity: Global liquidity tightening cycle has peaked and rate cuts are likely in the second half of 2024, said HSBC. Assuming a Donald Trump victory in USA’S presidential elections in November, leading to a rebound in inflation caused by a universal import tariff, analysts at Rabobank International expect the Fed to pause its cutting cycle after two rate cuts in 2025. The Reserve Bank of India is expected to follow its US peer in rate cutting cycle.