Indian stock market: Is meltdown in small-cap stocks an opportunity for bottom fishing?

livemint.com:

Indian stock market: This month’s meltdown in India’s smaller stocks is being termed as a buying opportunity by some investors despite the securities regulator’s warnings of a potential bubble. Perceived as key beneficiaries of the South Asian nation’s 8%-plus economic growth, shares of smaller firms are seen staging a comeback after a selloff that’s pushed down the Nifty Smallcap 250 Index almost 10% since Feb. 27.

That was the day the Securities and Exchange Board of India (SEBI) directed mutual funds to take steps to shield investors from the speculative froth in small- and mid-cap stocks. The rout follows a stellar run that saw the small-cap gauge add over $230 billion in value since March last year, driven by robust earnings and relentless flows from India’s army of retail investors. While valuations are still rich, buyers with a sense of history say episodes of tumult like the current one are common in a bull market and tend to spur a shift to quality.

“It is without doubt an opportunity to purchase high-quality, well-managed companies at more attractive prices," said Mike Sell, head of global emerging equities at UK-based Alquity Investment Management Ltd. “Nothing fundamentally has changed, while recent corporate commentary paints a stronger picture than is perhaps widely appreciated." Morgan Stanley earlier this week said that India’s current economic expansion resembles the boom period of the mid-2000s, when growth averaged more than 8%. During that era, a small-cap index managed by the BSE Ltd.

skyrocketed over 1,200% — an ascent that saw several bouts of shortlived corrections. The National Stock Exchange’s small-cap measure was introduced much later. It has seen two corrections — of 27% and 14% — since March