India’s Stock Market Slump: A Cause for Concern
Small-Cap Stocks Bear the Brunt
A prolonged sell-off in Indian stocks shows no signs of slowing down, with the NSE Nifty Smallcap 250 Index plummeting 20% from its September peak. The index narrowly avoided entering a bear market on Tuesday, closing 1.8% lower after a 3.9% slump earlier in the day. This marks a significant decline, with the gauge dropping 3.7% the previous day.
Fear Gauge Hits Highest Level Since August
The NSE India Volatility Index, also known as the fear gauge, surged to its highest level since August on Monday. This increase in volatility is a clear indication of the growing unease among investors. Foreign funds have been exiting the market, withdrawing over $19 billion on a net basis since the end of September, with over $7 billion of outflows occurring in January alone.
Retail Investors in a Panic
“There is a panic-like situation among retail investors,” said Vikas Gupta, chief investment strategist at Mumbai-based OmniScience Capital. Individual investors, who typically invest in small-sized firms, are now facing concerns over valuations and growth outlook. The small-cap gauge had jumped more than 26% in 2024, following a 48% surge in the previous year. However, it has slumped more than 14% in January and is on course for its biggest monthly fall since March 2020.
Valuations Under Pressure
The index is now trading 22 times its 12-month forward earnings, down from a peak of 26 in December. This decline in valuations has made some companies in the small- and mid-cap space attractive, according to Abhay Agarwal, a fund manager with Piper Serica Advisors Pvt. “We are deploying cash in our portfolio” after selling some holdings in the final months of last year, he added.
India’s Economic Slowdown
India’s economic growth is expected to slide to a four-year low, weighed down by high inflation and interest rates. Corporate earnings are starting to falter, leading investors to question whether Indian stocks are worthy of their valuation premium 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.
Benchmark Index Recovers
Meanwhile, the benchmark NSE Nifty 50 Index recouped some of Monday’s losses to close 0.6% higher, as shares of blue-chip companies bounced back. The swings came amid thin trading in Asia, with several regional markets closed for Lunar New Year holidays.
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