Indian stock market: Smaller stocks meltdown seen as buying opportunity despite bubble warnings
Investors in India are viewing the recent meltdown in smaller stocks as a potential buying opportunity, despite warnings from the securities regulator about a possible bubble. The Nifty Smallcap 250 Index has dropped almost 10% since February 27, prompting the Securities and Exchange Board of India (SEBI) to caution mutual funds about speculative froth in small- and mid-cap stocks.
However, some investors believe that smaller firms, which are perceived as key beneficiaries of India’s economic growth, could stage a comeback. The small-cap gauge had seen significant gains since March last year, driven by strong earnings and retail investor interest. While valuations remain high, some buyers see the current market turmoil as a chance to invest in high-quality companies at more attractive prices.
Experts point to historical trends, noting that market corrections are common during bull markets and often lead to a shift towards quality investments. Morgan Stanley has compared India’s current economic expansion to the mid-2000s boom, which saw a significant surge in small-cap stocks.
Despite the recent corrections, the small-cap index is still trading at elevated valuations, prompting some strategists to recommend a switch to larger companies. However, bulls argue that smaller companies have delivered strong profit growth in recent years, outperforming the broader market.
As stocks continue to face volatility, both domestic and foreign funds have been buying into the declines. Local funds injected a record $1.1 billion into shares during a recent selloff, while foreign funds are also showing interest in Indian mid- and small-caps.
Overall, investors see the current market turbulence as an opportunity to capitalize on potential gains in smaller stocks, with some foreign funds increasing their exposure to the sector. Despite the uncertainties, many remain optimistic about the long-term prospects of India’s smaller companies.
