Is It Time To Buy The Dip? Here's What Stock Analysts Say

The selloff in benchmark indices and the broader market seen on Wednesday may not be isolated. The correction was necessary and there is more pain around the corner, according to analysts.

The fall is predominantly attributed to high valuations along with a few regulatory actions, according to Harsha Upadhyaya, CIO-Equity, president, Kotak Mahindra Asset Management Co. "The stocks have gone up crazily in recent times and not in all cases they have gone up with the support of fundamentals."

It is very difficult to assume that this decline is going to stop in the very near term, Upadhyaya said. "This could continue as small caps were about 45% premium to their historical average and at a premium to large caps. so a small correction will not correct those valuations."

Dragged by the broader markets, the benchmark indices ended sharply lower to continue their losses for the third consecutive day on Wednesday. The Nifty 50 ended below 22,000 for the first time in March at 21,997.70, down 338.00 points or 1.51%. The Sensex closed at 72,761.89, down 906.07 points or 1.23%. Midcap 150 tumbled over 4%, while Smallcap 250 plunged over 5%.

On Wednesday, the broader markets underperformed its large caps peers, with the Nifty Midcap 150 and Nifty Smallcap 150 falling by 4.17% and 5.18%, respectively.

While the valuations were the bigger concern for the selloff in today's session, the trigger for the broker markets comes from the recent regulatory comments regarding froth in the mid- and small-cap space.

The Securities and Exchange Board of India asked mutual funds to proactively protect investor interest amid "froth" building up in the broader end of the Indian equity market. The market regulator has asked AMCs to be cautious and consider moderating flows and rebalancing portfolios.

Asset management companies will have to disclose the results of the stress test for small and mid-cap schemes by March 15 for the preceding month. AMCs are required to disclose the results on their respective websites, as well as on AMFI’s website, on a monthly basis within 15 days after each month, starting with disclosure for the month of February 2024 by March 15.

The recent crackdown on One 97 Communication Ltd.'s Paytm Payments Bank, JM Financial Ltd. and IIFL Finance Ltd. have also contributed to the selloff, according to analysts.

Consolidation is the way forward for the benchmark indices, especially for the border markets, according to analysts.

"This is the beginning of actual pain," according to Nagraj Shetti, senior technical research analyst, HDFC Securities. From the all-time highs of 22,526, Nifty has started its actual downward correction, he said. "This is a good reversal point and I believe the immediate supports have been broken. The next lower levels will be 21,400 to 21,300 for the next couple of weeks."

While there has been a correction for the mid- and small-cap stocks, there is more pain to come in the large-cap space, Shetti said. "One has to wait for bottom fishing in large caps."

According to Shetti, it is better to exit the long positions. "If investors are really holding and riding the recent uptrend over the last few months, it is better to book profit and come out of the holdings."

It is better for investors to wait if they wait to take fresh positions, as there is more pain to come, according to Vijay Chopra, MD and CEO, Enoch Ventures. "Definitely, the call is to stay away from mid- and small caps and be into the larger companies. I think that these corrections are healthy, and must happen. There might be more pain around the corner."