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Fall 2024 May Not Be A Repeat Of 2018

By Puneet Wadhwa
April 01, 2024 10:19 IST
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'We expect the bull-market phase to still persist, but now led by large-caps which offer better valuation and benefit from FII inflows.'
'We expect continued pressure on midcaps, but any sharp correction looks unlikely from here on.'

IMAGE: Kindly note the image has been posted only for representational purposes. Photograph: ANI Photo

Midcap and Smallcap stocks have taken it on their chin in the past few weeks as both the indices on the NSE slipped 3.3 per cent and 6.5 per cent, respectively.

The cuts in individual stocks that comprise these indexes have been much sharper. In comparison, the Nifty50 index has been flat, albeit amid volatility.

So, is the fall in the midcap and smallcap indices the start of a deeper correction as seen in 2018? Analysts at HSBC do not think so.

The market correction in 2018, they believe, was led by several risk events coming together in the same year, which triggered the market bear phase.

Concerns, back in 2018, started at the beginning of the year, with the government's introduction of 10 per cent tax on long-term capital gains (LTCG) during the February 2018 budget.

Global liquidity tightening amid fears of steeper rate hike by the US Federal Reserve, and rising crude prices dented external finances.

Towards 2018-end, another round of market sell-off was triggered by domestic credit crunch in the non-bank finance companies (NBFC) space post IL&FS debt default, amid overall slowing gross domestic product (GDP) growth environment both globally and in the domestic market.

All this triggered a sharp correction in equity markets with the midcap/smallcap indices correcting by 24 per cent/31 per cent, respectively between January and October 2018, shows data.

'Both periods coincide with a nearly 4-year prior period of outperformance of small and midcap names over the broader market, with the bull run before the correction similar in both the contexts (smallcap 4-year CAGR of around 30 per cent and midcap CAGR of nearly 27 per cent),' wrote Herald van der Linde, head of equity strategy for Asia Pacific at HSBC, in a coauthored note with Amit Sachdeva and Anurag Dayal.'

'Hence the worry as to whether similar period is ahead, and this correction is only the beginning.'

This time in 2024, however, analysts at HSBC argue that things are different. Investors, they suggest, use the current phase to buy selectively from a long-term perspective.

'We expect the bull-market phase to still persist, but now led by large-caps which offer better valuation and benefit from FII inflows. We expect continued pressure on midcaps, but any sharp correction looks unlikely from here on,' HSBC said.

Nykaa, Equitas, Titagarh, Prestige Estates, Phoenix Mills, Ipca Labs, Voltas, and Kalyan are their top 8 midcap ideas at the current levels.

Here are 5 key reasons, analysts at HSBC believe, why the fall seen thus far in 2024 is different from 2018 and why history may not repeat itself.

GDP growth: Indian economy, HSBC said, is on a far better and stable footing now versus 2018. India's GDP growth at 6.9 per cent, HSBC said, continues to be way better than the 3.9 per cent recorded in 2018.

With economic momentum on its side, most analysts expect Indian equities to be on FIIs radar in the months ahead.

Liquidity" Global liquidity tightening cycle has peaked, HSBC said, and rate cuts are likely in the second half of 2024.

Assuming a Trump victory in November, leading to a rebound in inflation caused by a universal import tariff, analysts at Rabobank International expect the US Fed to pause its cutting cycle after two rate cuts in 2025.

On its part, the Reserve Bank of India is expected to follow its US peer in the rate cutting cycle.

Better regulatory systems: Domestic regulators -- the RBI and Securities and Exchange Board of India (Sebi), HSBC said, appear vigilant and ready to take pre-emptive measures to avoid any big financial crisis.

Recently, Sebi proactively warned of expensive valuations in the midcap-smallcap space, triggering a sharp correction in the broader markets.

Strong SIP flows" Domestic fund flows through monthly Systematic Investment Plan (SIP), HSBC said, have more than doubled since 2018 and are very stable, which should cushion downside risk in the markets.

As per Association of Mutual Funds in India (AMFI) data, monthly SIP contributions reached a fresh high of Rs 19,186 crore (Rs 191.86 billion), surpassing January's Rs 18,838 crore (Rs 188.38 billion).

Overall, the mutual fund industry witnessed an inflow of Rs 1.2 trillion in February, shows data.

Valuation: Midcap valuation premium to large-caps, HSBC said, is more reasonable now at 17 per cent (30 per cent in January 2024), as compared to peak in 2018 (35 per cent).

Corporate earnings, too, witnessed a sharp downgrade in 2018 on rich expectations (22 per cent).

'The current expectation at 15 per cent is more realistic, in our view,' HSBC said.

Feature Presentation: Ashish Narsale/

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