Indian stock market: Small-cap stocks present buying opportunity despite regulator warnings
Investors in India are eyeing 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 see this downturn as a chance to invest in high-quality, well-managed companies at more attractive prices. Mike Sell, head of global emerging equities at Alquity Investment Management Ltd, believes that recent corporate commentary indicates a stronger picture than is widely appreciated.
The recent selloff comes after a period of significant growth in small-cap stocks, driven by robust earnings and retail investor interest. Despite rich valuations, historical trends suggest that such corrections are common in bull markets and often lead to a shift towards quality investments.
Morgan Stanley has likened India’s current economic expansion to the mid-2000s boom period, during which a small-cap index soared over 1,200%. While the small-cap gauge on the National Stock Exchange has experienced corrections in the past, it has consistently bounced back strongly in the following months.
Deven Choksey, managing director of DRChoksey FinServ Pvt. in Mumbai, views the current correction as a positive development for investors. However, some strategists, including those at Goldman Sachs, recommend a shift towards larger companies due to elevated valuations in the small-cap segment.
Despite the challenges, bulls remain optimistic about the potential returns in smaller companies, citing strong corporate profit growth in recent years. As stocks continue to fluctuate, both domestic and foreign funds are seizing the opportunity to buy into the declines, with record inflows reported on Wednesday.
Overall, the volatility in the market is seen as an opportunity for investors to capitalize on potential gains in the small-cap segment. Foreign funds, in particular, are showing interest in Indian mid- and small-caps, indicating a positive outlook for the market in the coming months.
