The rise in listing by small companies is a reflection of India’s strong economic performance and a healthy diversion of capital to sectors most in need. But it comes with the added risk of performance disappointment if GDP growth is not as robust as investors are projecting. Valuations in pockets of small and midcaps have dissociated from earnings potential, which bears out Sebi’s view of froth, if not an outright bubble. Fund houses are telling their retail clients to cut leveraged positions and are discouraging lump-sum investments in smallcaps in anticipation of a deep correction in this segment. The warnings from the regulatory and the mutual fund industry are an attempt to divert a bigger portion of the rising tide of retail investments towards largecaps, where the market rally may still have some legs.
India is the most expensive emerging market and cannot remain unaffected by a flight to safety if global growth falters. The market is heeding warnings and counter-measures by Sebi over pockets of irrational exuberance. But these may not be enough to protect retail investors jumping into the last stages of a bull market.
