Triangulating the outperformance of small and mid cap indices relative to Nifty during the aggressive FPI selling period and relatively lesser midcap and small cap buying by mutual funds in October, ICICI Securities believes FPI selling supply was moderate in this space. FPIs’ relative leaning towards midcap and smallcap stocks reflects higher growth outlook and under-ownership, the brokerage said.
ICICI Securities, however, believes that if a major unknown risk-off macro event were to play out, then in such a scenario, smallcap and midcap stocks in their current state would still offer low margin of safety in terms of their earnings yield spread, even after the recent correction in stock prices.
"Given that such assets have relatively low liquidity only exacerbates the problem in a risk-off environment," it said.
While the stock level selling and buying data for FPIs is not yet available for October and November, ICICI Securities said if FPIs had aggressively sold mid-small caps, the drawdowns in such indices would have been large given their lower liquidity.
"Nevertheless, large drawdowns during this selling period were witnessed in consumption and unsecured lending space across large, mid and small cap spaces," it said.
Benchmark mid and small cap indices currently reflect higher earnings growth trajectory over FY24-26E, relative to Nifty index despite consensus earnings cut observed across corporate India during Q2FY25.
As of October 24-end, the aggregate holdings of FPIs in Indian stocks stood at Rs 71 lakh crore against the aggregate market capitalisation of Rs 444 lakh crore, thereby, implying FPI holdings in Indian equities fell further to 16 per cent, which is a decadal low.
"While FII were sellers, MF bought Rs 64,700 crore of stocks, mostly in large cap space (Rs 43,100 crore) while mid, small and micro caps together accounted for Rs 12,100 crore buying. MF invested approximately Rs 9,500 crore in IPOs. Major inflows were observed in autos, private banks, industrials, consumer discretionary, IT, PSU banks, etc.; outflows have been observed in financial service sector," it said.
JM Financial in an earlier note said a larger per cent of small and midcaps (SMIDs) witnessed EPS cuts for FY25 and a larger percentage of small and midcap (SMIDs) saw over 10 per cent EPS cuts post Q2 results.