Nearly half the stocks in the broader market have come off more than 20 per cent from their yearly highs, even as the benchmark indices are only three per cent shy of new record highs.
In the BSE 500 index, 91 per cent of India's market capitalisation, 199 scrips have lost 20 per cent or more from their highs as investors have turned wary, due to deteriorating fundamentals and lack of earnings growth.
Similarly, 237 of 850 components in the BSE Small cap Index have lost more than 20 per cent from their one-year peak, with 80 of these plunging over 50 per cent.
Analysts say benchmark indices could be hiding the pain and volatility the broader market is witnessing. The Sensex and the National Stock Exchange's Nifty are up 20 per cent this year and have seen almost no sharp fall, thanks to contributions by index heavyweights such as HDFC, HDFC Bank, Reliance Industries and ITC. Despite the underperformance from others, these constituents are propelling the indices to new highs.
Analysts say weakness could be creeping into the broader markets after sharp gains in the initial months took valuations to record levels.
"In several cases, the stocks rallied in anticipation of growth. However, going by corporate earnings, revival in growth is still two-three quarters away. Meantime, investors started getting concerned about the fundamentals of several small companies, leading to a sell-off in several pockets of the market," said G Chokkalingam, managing director, Equinomics Research & Advisory.
The past two weeks of share price falls was more pronounced in the broader market. Currently, 210 of the BSE 500 companies are trading below their 200-day moving average (DMA). A fall below 200-DMA indicates a stock is in a structural downtrend. The figure was 150 on September 18, before the market fall started. In other words, 60 companies plunged below their one-year average trading price due to selling in only seven sessions.
The trend is likely to continue in the near to medium term. Muted earnings and slowing in macroeconomic factors could keep the markets on edge. Analysts are predicting single-digit earnings growth for the quarter ending September, mainly on account of the Goods and Services Tax's (GST's) impact and a high base.
"The market is yet to ascertain the complete impact of GST on earnings. Slowing in economic growth would also have an impact on India Inc. Going by the recent correction, investors seem to be reacting to the changing scenario. However, investors needn't panic, as the long-term picture still looks intact," said Gautam Duggad, head of research, Motilal Oswal Institutional Equities.
Interestingly, several big brokerages and wealth advisors have now started advising investors to stay cautious about mid-cap and small-cap stocks, and to prefer blue-chip ones. This is in contrast to the previous stance of many brokerages, asking their clients to do the reverse for generating benchmark-beating returns. Typically, mid-cap and small-cap stocks outperform benchmarks during a bull-run. However, whenever there is a correction, they also fall sharper than the benchmark indices.