Indian stocks are witnessing a bloodbath; Small and medium stocks have suffered a huge blow

Mumbai: Fears of a lower US rate cut and a rise in the greenback sent markets into a tailspin on Monday, leaving investors even poorer. 12 trillion overnight.

The carnage spared no corner of the market – while Nifty and Sensex fell 1.5% and 1.4% to close at seven-month lows of 23,085.95 and 76,330.01 points, with Nifty mid-cap and small-cap underperforming the broader market. And it was worse. The index fell 4% to a seven-month low of 52390.4 and hit 16159.9 points.

The rupee also remained untouched and slipped below the level of 86 for the first time. The local currency declined 0.7% or 56 paise – its biggest decline in two years – to close at a record low of 86.57 against the dollar.

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Weak corporate earnings could make matters worse.

“The market in 2025 will be a tale of two halves,” said Ashish Gupta, chief investment officer at Axis Mutual Fund, with the first half being more challenging due to a slowdown in earnings. “It is likely that income growth will be only 5%, and many sectors like auto, banks and cement will be affected. If you look at the global commodity sector like oil, gas and metals, all of them will report negative earnings growth. So, while valuations for many of these sectors, particularly financials, are quite attractive, our earnings growth will not support them.

Gupta said the strong dollar has impacted global fund flows and these headwinds may emerge only in the second half of 2025. Provisional data showed that foreign institutional investors sold stocks worth a net There was a turnover of Rs 4,893 crore on Monday, while domestic institutional investors made net purchases. 8,066 crores.

The market was hit by unexpectedly strong US jobs data, which led investors to see just one US rate cut by 25 basis points through 2025. That pushed 10-year US Treasury yields to a 14-month high and pushed the dollar higher, making emerging markets like India less attractive for investment.

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Executive Director and Chief Investment Officer, ICICI Prudential AMC S. Narine highlighted that mid-cap and small-cap stocks are overvalued, while large-caps, although not cheap, are less overvalued in comparison. He advised investors to temper near-term return expectations as valuations remain high.

Nifty is currently trading at a price-to-earnings (P/E) multiple of 20.03, below its five-year average of 24, Bloomberg data shows. In comparison, Nifty Smallcap 250 is trading at a P/E of 28.93, which is close to its five-year average of 29.15.

According to Nitin Jain, chairman and managing director of wealth, asset and risk management platform Neo Group, although the Indian market is in a “mega bull run” that could last for a decade, the Nifty could remain in the range of 21,000 to 25,000. This year, “from a structural perspective, it is important to diversify into high-quality companies across market capitalization,” yet, Jain believes that mid-caps and small-caps will be a viable option for investors in the medium and long term. More likely to generate alpha. Whereas large-caps provide protection against volatility and are likely to deliver stable, benchmark-aligned returns.

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Last year Nifty has given 5% return while Nifty Smallcap 250 has gained 11%.

Gaurav Dua, head of capital markets strategy at Mirae Asset Sharekhan, highlighted the risk appetite in the broader market and the fact that the risk-reward balance now looks better in large-caps.

“From here, we believe the bulk of the price damage is behind us in large-cap stocks,” he said. However, he believes the recovery can be extended to small and micro-caps. Furthermore, “Given the pressure on the rupee, we expect some export-driven sectors such as pharma, apparel and IT services to outperform domestic demand-driven sectors.”

Dua also recommends some investment in precious metals, as gold will also benefit from widespread uncertainties and rupee depreciation.

Narine said the rupee has appreciated against most currencies except the dollar, which shows that the issue is the strength of the dollar rather than the rupee. He said a possible trigger for a market correction would be the stabilization of the dollar. Speaking to reporters, he stressed that any further correction in the market would present better opportunities for long-term investors.

Market experts have emphasized that Indian equities are facing an environment of uncertainty due to factors like the anticipated policies of US President-elect Donald Trump, Union Budget 2025-26 and possible exodus of foreign investments.

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Meanwhile, Kotak Institutional Equities’ January 13 report said, “The recent sharp decline in the Indian market and shares of various stocks does not change our cautious outlook for the market, (1) full-to-frothy in most parts; The market remains bullish given the valuations, (2) very aggressive earnings, profitability and volume assumptions across sectors and (3) low scope for earnings upgrades given the uncertain global outlook. The macro-environment and the prospect of higher bond yields and interest rates over the long term”.