Stating that it fails to find fundamental reasons behind the steep increase in stock prices of several midcap and smallcap stocks, Kotak said, the primary driver of the rally appears to be irrational exuberance among investors, with high return expectations being driven by the high returns of the past few months.
Patwardhan underscored that market valuations are reasonable, but there are pockets of overvaluation in select segments that could be vulnerable to changes in sentiment. Mid and small caps are outperforming large caps due to increased domestic flows and their underperformance in the previous phase.
After a remarkable run for several weeks, mid-caps and small-caps went into correction mode on September 12, a day after Kotak Institutional Equities called the rally in midcaps “irrational exuberance.” In today’s trade, NSE Mid-cap index fell 2.62 percent, while the Small-cap index was down 3.4 percent.