Smallcap gauge heads for bear market as stock selloff intensifies

By Ashutosh Joshi and Abhishek Vishnoi

 

A months-long selloff in Indian stocks is showing few signs of abating, with a gauge of smallcap shares plunging on Tuesday to take its losses from a September peak to 20 per cent.

 

The NSE Nifty Smallcap 250 Index was on course to enter a bear market after losing about 3.5 per cent early in Tuesday’s session after a similar drop the previous day. The NSE India Volatility Index, also known as the fear gauge, rose to the highest level since August on Monday.

 

Indian stocks have suffered in recent months as concerns over a slowdown in economic as well as earnings growth have seen foreign funds exit the market. Small- and mid-cap stocks seem to be bearing the brunt of the latest slide as risk-off moves deepen amid high valuations. 

 

 

Overseas investors have withdrawn more than $19 billion from the market on a net basis since the end of September, with over $7 billion of outflows happening in January alone.

 

“There is panic like situation among retail investors,” said Vikas Gupta, chief investment strategist at Mumbai-based OmniScience Capital. Individual investors typically invest in shares of small-sized firms that have delivered stellar returns in recent years and concerns over their valuations and growth outlook are catching up, he said. 

 

The smallcap gauge jumped more than 26 per cent in 2024 following a 48 per cent surge in the previous year. The index has slumped more than 16 per cent in January and is on course for its biggest monthly fall since March 2020. It is now trading 22 times its 12-month forward earnings, down from a peak of 26 in December.

 

India was a darling for global equity investors until just a few months ago, threatening even to topple China in emerging-market indexes, as a pandemic-era consumption boom and the government’s strong focus on infrastructure creation boosted the market as well as corporate profits. However, an ensuing demand slowdown amid high inflation and interest rates has weighed on the economy, with growth seen sliding to a four-year low.

 

With corporate earnings starting to falter, investors have questioned if Indian stocks are worthy of the valuation premium they command over emerging-market peers.

 

“This small-cap selloff, caused due to high valuation expansion over the years, can extend the collateral damage for the broader market as well,” said Deven Choksey, managing director at DRChoksey FinServ Pvt. “Many people have taken unduly large exposure to small stocks. The high valuation leaves no scope for error.”

 

Meanwhile, benchmark NSE Nifty 50 Index recouped some of Monday’s losses to gain 0.6 per cent as shares of blue-chip companies bounced back. The swings came amid thin trading in Asia as several regional markets including China, South Korea and Taiwan are shut for Lunar New Year holidays.