An $80 billion crash in smallcaps flashes warning signs
broader Indian market, which is now an underperformer in Asia Pacific after a multi-year rally.
An index of small-cap stocks has lost more than $80 billion in market value in less than two weeks after authorities flagged risks of overheating and guided funds to limit purchases. The selloff deepened on Wednesday, with gauges of small- and mid-cap stocks plunging more than 4% each.
As sentiment weakens, investors are pulling money out of richly valued larger shares as well. The MSCI India Index is now lagging behind MSCI’s Asia Pacific index for a second straight month, with markets such as Taiwan and South Korea more in favor due to their exposure to chip shares and the artificial-intelligence boom. Some investors anticipate losses will deepen.
“The regulatory actions against small cap stocks are testimony to the valuation froth in India,” said Nitin Chanduka, a strategist at Bloomberg Intelligence. “India could continue to underperform Asia going into the national elections in the next few weeks and amid the chip rally in other markets in the region.”
The Securities and Exchange Board of India has been concerned about large flows into small- and mid-cap stocks amid an outsized rally in the riskiest area of the nation’s $4.3 trillion market over the past year. Late last month, it asked funds to come up with measures to moderate inflows into related plans and safeguard investors from sudden redemptions.
“It may not be appropriate to allow bubbles to keep building because when they burst, they impact investors
