The beginning of 2025 has proved to be very bad for midcap and smallcap stocks. Both these indices have performed worse than the benchmark Nifty50 so far this year. Experts believe that there is little possibility of improvement in the near future.
The Nifty Midcap 150 index has declined about 7% so far in 2025, while the Nifty Smallcap 250 index has fallen about 9%. At the same time, Nifty 50 index has weakened by about 2% in the same period.
VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said, “Two important trends are visible in the market. First, institutional activity—where FIIs are continuously selling and DIIs are buying. Second, a trend towards quality—large-cap stocks are strong while the broader market is weakening. “Both these trends may continue in the near future.”
He further said, “The dollar index and US bond yields remain at high levels. In such a situation, the possibility of FIIs becoming buyers is not visible at the moment.”
The recent decline in midcap and smallcap stocks has put brakes on the spectacular rise of many years. According to a BNP Paribas Securities report, the last time both these indices recorded a loss in a calendar year (CY) was in CY19, when the Nifty Midcap 100 fell 4% and the Nifty Smallcap 100 fell 10%.
BNP Paribas says that due to the tremendous rise in midcap and smallcap stocks, their valuations have become very expensive, especially compared to largecap stocks. In such a situation, investors have been advised to focus on largecap stocks in CY25.
Kunal Vora, Head of India Equity Research at BNP Paribas Securities, said, “The good performance of midcaps and smallcaps in CY24 was driven by large inflows from domestic institutional investors (DIIs). The rise in these shares since January 2023 has made their valuation expensive compared to Nifty 50. “At present, the price-to-earnings (P/E) ratio of Nifty Midcap for the next 12 months (NTM) is 58% higher than the P/E of Nifty 50.”
So far in CY25, 109 stocks (72 per cent) out of 150 stocks comprising the Nifty Midcap 150 index are trading below their 200-day moving average (DMA). At the same time, out of 250 stocks of Nifty Smallcap 250 index, 171 stocks (68 percent) are trading below their 200-DMA. These figures reflect the weakness of the market.
Stocks that suffered the most losses this year include Kalyan Jewelers India, Kaynes Technology, Aditya Birla Real Estate, KEC International, Oracle Financial Services Software, Oberoi Realty and PB Fintech. According to ACE Equity data, these stocks have fallen by 37 per cent so far in CY25.
Stocks like Vodafone Idea, SBI Cards, Navin Fluorine, SRF, Shyam Metalics, Redington and Sundaram Finance have performed brilliantly in CY25, gaining up to 20%.
However, market experts say that the downward pressure on small and midcap stocks may continue. G Chokkalingam, Founder, Equinomics Research, said, “Many good small and midcap stocks have fallen significantly. This situation may continue till mid-March 2025. “This is due to global conditions, rising oil prices, decline in the value of many stocks and shortage of cash.”
He advised that investors who have the ability to withstand another 5-7% decline in the index can hold quality small and midcap stocks. Also, it may be beneficial to invest further in these stocks on every dip till March 2024.