Smallcap Stocks Enter 'Bearish' Territory With Retail Investors Hurting Most

Woes for retail investors continue as India's small stocks fell over 20% from their peak in September to fall into the so-called 'bearish' zone with muted earnings and foreign exodus weighing on the market.

The benchmark gauge for small-caps stocks — Nifty Smallcap 250 — fell 3.4% on Tuesday to take the fall to over 20% from its life-high in September last year. This rout on the small-cap index marks the worst start to any year.

Meanwhile, the benchmarks, Sensex and Nifty, are set for their fourth straight month of losses in January, the longest losing streak in 23 years.

Nifty Midcap and Smallcap are on course to record the biggest monthly fall since March 2020. The Nifty Next 50—the next rung of liquid securities after the Nifty 50—has already fallen into the so-called 'bearish' zone.  

Muted earnings, slowing economic growth and volatility fueled by Donald Trump's proposed tariff policies are among the key triggers for the turmoil in the market.

For analysts at Morgan Stanley, the current selloff is a buying opportunity with an understanding that it is hard to time the bottom. "A growth slowdown has unnerved the market and believe that growth is returning soon," the brokerage said in a note.

The price fall has been on falling trading volumes implying an absence of a bid rather than a forceful selling, it said. "Retail investors have exhibited resilience," and important reasons for the slow growth patch are getting behind, it said.

Amongst the worst hit are the retail investors with their ownership in smallcap stocks on the rise. Over the years, retail investors have increasingly gravitated toward these companies, building substantial holdings.

As of September quarter, domestic institutions and global funds hold 24.53% and 21.76% of the free-float value in small-cap companies, respectively. Retail investors, however, hold nearly an all-time high of 27.06%, according to PRIME Database.

The value of retail investors' investment in small-cap companies as of the September quarter stood over Rs 10.28 lakh crore.

Sterling and Wilson Renewable Ltd. and Honasa Consumer Ltd., are the worst hit smallcap stocks since their highs in September last year after having tumbled over 50%. Inox Wind Ltd., Netweb Technologies Ltd. and Chennai Petroleum Corp. are other stocks that took a beating.

Amber Enterprises India Ltd. outperformed the selloff with a gains of nearly 22% followed by Aster DM Healthcare and Laurus Labs Ltd.

So far in January, foreign institutions have been net sellers of $67,022 crore worth of Indian equities. While being net buyers in primary market, FIIs have already sold secondary stocks worth $69,492 crore.