Small & micro-caps charge to the front, bluechips need a FPI reload

Small and micro-cap stocks clawed back losses from the peak of the West Asia conflict, while mid-caps are a whisker away from reaching the pre-war levels, fuelled by a return of local investors, especially to these battered broad market shares. Blue chips are yet to recover fully as the shadow of foreign investors’ risk aversion to India limits gains.

The Nifty small-cap 250 index on Thursday traded 2% higher from February 27, the day before the USIran war started. The index had declined as much 11%. The Nifty Micro-cap 250 was 4.5% above after falling up to 11.5%.

The Nifty Midcap 150 was down 0.3% as of Thursday after dropping as much as 12% during the conflict. The benchmark Nifty, comprising blue chips, was down 3.9%. The index too fell up to 12%.

“Sharper correction in large-cap heavyweights is because of global risk aversion, persistent FPI outflows, and macro uncertainty, while strong domestic institutional participation helped cushion broader market segments,” said Shreyash Devalkar, head — Equity, Axis Mutual Fund.

Foreign institutions, which mostly hold large-cap stocks, have sold shares worth over ₹1.6 lakh crore since the start of the conflict, while their domestic counterparts bought worth ₹1.77 lakh crore. Domestic individual investors’ interest in smalland micro-cap stocks drove their recovery.

“Mid and small caps have outperformed recently, helped by lower exposure to FII selling and better than expected earnings, which are expected to grow in the high single to low double digits despite earlier slowdown concerns,” said Abhilasha Satale, fund manager — Equity, Quantum AMC.

A decline in their valuations from their peaks in September 2024 stoked investor interest in smaller shares.“Valuations for both segments have also moderated to around 29 times trailing price to earnings (P/ E), below historical averages of 32 times P/E for small caps and 30.5 times P/E for midcaps, making the segment more attractive,” said Satale.

The pace of the rebound in midcap and small-cap stocks may not sustain, as many of these companies could face earnings pressure.

“Near-term risks like currency depreciation, energy shortages, and rising crude prices persist, which could weigh on earnings in the next few quarters,” said Rakesh Vyas, CIO & portfolio manager at Quest Investment Managers. “Historically, large caps tend to outperform in such environments. Any conflict-led earnings cuts are yet to be fully priced in, which could temper growth expectations,” he said.

Devalkar of Axis also said if oil prices remain elevated for an extended period, uncertainty is likely to persist.