An $80 billion crash in India’s small caps flashes warning signs | India Business News


rapid improvement in small-cap stocks This reflects risk appetite in the broader Indian market, which after several years of bullishness is now the underperforming market in the Asia Pacific region.
The market value of an index of small-cap stocks has lost more than $80 billion in less than two weeks after authorities flagged the risks of overheating and directed funds to limit purchases. The selloff deepened on Wednesday, with small- and mid-cap stocks falling more than 4%.
As sentiment weakens, investors are also pulling money out of highly valued large stocks. The MSCI India index is now lagging MSCI's Asia Pacific index for the second straight month, with markets like Taiwan and South Korea in favor of the chip stocks and artificial-intelligence boom. Some investors predict the losses will deepen further.
“The regulatory action against small-cap stocks is evidence of rising valuations in India,” said Nitin Chanduka, strategist at Bloomberg Intelligence. “India may continue to underperform in Asia amid national elections over the next few weeks and a chip rally in other markets in the region.”
The Securities and Exchange Board of India (Sebi) is concerned about huge inflows into small- and mid-cap stocks amid a huge rally in the riskiest sector of the country's $4.3 trillion market over the past year. Late last month, it asked funds to take measures to ease inflows into related schemes and protect investors from sudden redemptions.
“It would not be appropriate to allow bubbles to continue forming because when they burst, they have an adverse impact on investors,” Chairman Madhabi Puri Buch said earlier this week. He said SEBI is ready to allow money managers to hold more large-cap stocks in their small-cap portfolio for risk management.
Buch further said that the regulator has noticed a “pattern of price manipulation” in new listings taking place on the platforms for smaller companies. The sour mood is hitting debuts in India this week, with the three latest initial public offerings falling as much as 16% in their first trading days, compared with gains of an average of 20% this year through Wednesday.
In light of the regulator's comments, ICICI Prudential Asset Management Co on Tuesday said it will temporarily stop lump sum deposits in its mid- and small-cap funds from Thursday. Last month, Kotak Asset had imposed a cap on inflows on recurring schemes in its small-cap funds, citing the sharp boom in the segment which had led to “valuation distortions” in some cases.
The S&P BSE Small Cap index is down more than 12% from its all-time high hit earlier this year. Some investors used the decline to weigh on stocks as market participants overall remained bullish on Indian equities. Domestic institutional investors, including mutual funds and insurance companies, pumped a record $1.1 billion into local stocks on Wednesday, exchange data showed.
Small stocks led the record-breaking rally in the Indian equity market last year, forcing foreign funds to look beyond the usual large cap names. But it could also mean that there are more negative possibilities.
“The space was very hot and the correction could not be done in a hurry,” said Porinju Veliyath, founder and portfolio manager at Equity Intelligence Pvt Ltd. “There's still a lot of foam in places,” he said. The recession may provide an opportunity for investors to enter quality stocks.

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