“The regulatory actions against small-cap stocks are testimony to the valuation froth in India,” said Nitin Chanduka, a strategist at Bloomberg Intelligence. “India could continue to underperform Asia going into the national elections in the next few weeks and amid the chip rally in other markets in the region.”
A sharp correction in small-cap stocks portends souring risk appetite on the broader Indian market, which is now an underperformer in Asia Pacific after a multi-year rally.
An index of small-cap stocks lost more than US$80 billion in market value in less than two weeks through Wednesday after authorities flagged risks of overheating and guided funds to limit purchases. Small- and mid-cap stock gauges of the Bombay Stock Exchange rebounded Thursday after plunging more than 4% each in the prior session.
As sentiment weakens, investors are pulling money out of richly valued larger shares as well. The MSCI India Index is now lagging behind MSCI’s Asia Pacific index for a second straight month, with markets such as Taiwan and South Korea more in favour due to their exposure to chip shares and the artificial intelligence boom. Some investors anticipate losses will deepen.
