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3 months ago

India's small, mid-caps stocks lose $47 billion amid moves to skim froth

People walk past the Bombay Stock Exchange (BSE) building in Mumbai, India, November 4, 2020.
People walk past the Bombay Stock Exchange (BSE) building in Mumbai, India, November 4, 2020. Photo : Reuters/Francis Mascarenhas/Files

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India’s small- (.NIFSMCP100) and mid-cap (.NIFMDCP100) share indexes lost about $47 billion in combined market value this week, after the country’s markets regulator raised concerns about “froth” and suggested mutual funds limit lump sum investments.

The two indices had lost a combined $70 billion at intraday lows, but staged a recovery in the final two hours of trade, narrowing losses.

Still, these stocks logged their worst week in 15 months, as mutual funds started disclosing results of stress tests ordered by the Securities and Exchange Board of India to assess their resilience to sudden redemption pressures.

The data showed a disparity in the duration that the houses would take to liquidate their portfolios.

In a blistering rally that began nearly a year ago, the Nifty small-cap 100 index (.NIFSMCP100) nearly doubled in value and the mid-cap (.NIFMDCP100) index rose about 60 per cent, hitting record highs this February and sharply outperforming the blue-chip indexes.

Despite the recent correction, these stocks are at lofty valuations, analysts at Kotak Institutional Securities said, adding that “many low-quality stocks may still have a long way to fall.”

The Association for Mutual Funds in India (AMFI) has asked members to moderate inflows into small- and mid-cap funds and protect investors from large outflows, after strong inflows raised worries of a potential crash.

However, AMFI data for February last week showed that small-caps continued to attract the highest inflows after equity oriented schemes, despite valuations concerns.

Small-cap mutual funds have received higher inflows than mid- and large-cap funds for 17 months in a row.

“Even without stress tests, one thing is clear: the broader market valuations are unsustainable and some pockets are frothy,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services.

Indian small- and mid-cap share indexes have lost about $70 billion in combined market value this week, after the country's markets regulator raised concerns about "froth" and suggested mutual funds limit lump sum investments.

These stocks are also set for their worst week in 15 months, as mutual funds start disclosing results of stress tests ordered by the Securities and Exchange Board of India to assess their resilience to sudden redemption pressures.

The data showed a disparity in the duration that the houses would take to liquidate their portfolios.

In a blistering rally that began nearly a year ago, the Nifty small-cap 100 index (.NIFSMCP100) nearly doubled in value and the mid-cap (.NIFMDCP100) index rose about 60 per cent, hitting record highs this February and sharply outperforming the blue-chip indexes.

"Even without stress tests, one thing is clear: the broader market valuations are unsustainable and some pockets are frothy," said VK Vijayakumar, chief investment strategist at Geojit Financial Services.

The Association for Mutual Funds in India (AMFI) has asked members to moderate inflows into small- and mid-cap funds and protect investors from large outflows, after strong inflows raised worries of a potential crash.

Despite the recent correction, these stocks are at lofty valuations, said analysts at Kotak Institutional Securities, adding that "many low-quality stocks may still have a long way to fall."

However, AMFI data for February last week showed that small-caps continued to attract the highest inflows after equity oriented schemes, despite valuations concerns.

Small-cap mutual funds have received higher inflows than mid- and large-cap funds for 17 months in a row.

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