After going to hell in a handbasket on Wednesday, Indian bourses gained some warmth and cake overnight. On Thursday, benchmark equity indices closed up around half a percentage point.
The mid and small cap indices -- the chief mischief-makers -- too gained their composure, after surviving one of their worst single-day declines in recent years.
This was a far cry from the chaos seen on Wednesday. In all, about 88% of the 3,976 stocks listed on BSE came crashing down as if a grenade was thrown into a fragile building and Rs 13.5 lakh crore in value was vaporised in the BSE and NSE combined.
It is in such difficult moments that one would summon the power of collective fight, because, as they say, the lone wolf dies, but the pack survives. But, that logic clearly doesn't apply to markets. Ever.
Interestingly, Wednesday's crash comes from a classic origin. Much like students panicking ahead of exams, both mid and small cap indices developed cold feet just by hearing about the stress tests.
Sensing 'froth' in small caps, Sebi chief Madhabi Puri Buch had directed the Association of Mutual Funds India (AMFI) to ensure that Asset Management Companies (AMCs) prepare risk disclosures for investors regarding mid and small cap schemes and conduct stress tests to figure out if the portfolios are liquid enough to meet a sudden rise in redemptions.
"There are pockets of froth in the market. Some people call it a bubble, some may call it froth. It may not be appropriate to allow that froth to keep building," Sebi chief Madhabi Puri Buch noted last month. She further warned about high valuation concerns of small cap stocks leading to 'irrational exuberance.'
So fund houses started reducing their exposure, while others like ICICI Prudential Mutual Fund even suspended fresh subscriptions via the lumpsum mode into small cap and mid cap funds.
No wonder Sebi was seen as a scowling schoolmarm, and as news of the mandated AMFI-Sebi stress tests spread, mid and small cap indices started getting dizzy.
In fact, Wednesday's plunge came much faster than any Austenian's imagination that rapidly jumps from admiration to love to matrimony in a moment. And the selling was so widespread that just three stocks out of the 200 in mid and small cap indices ended in green. Fear, indeed, cuts deeper than swords, as author George RR Martin wrote.
Largecap stocks were kept out of the regulator's warning, and one could have expected them to send infinite courage to their counterparts and help overcome their nerve-racking ordeal, but that wasn't to be. Eventually, the broader market sank with the Sensex falling a shrieking 900 points to 72,762, wiping off Rs 13.5 lakh crore worth market capitalisation, while Nifty was down 1.5% to close at 21,998.
Coming to markets' rescue, veteran banker Uday Kotak said that there was currently no indication of a bubble and that there were enough checks and balances to prevent any major issues. But nothing stopped the scrips from getting mauled. From blue chips to public sector stocks, none were spared as Foreign Institutional Investors took out wheelbarrows of cash from equities totaling Rs 4,595 crore on Wednesday.
Some of the the biggest losers included Power Grid Corporation, Coal India, Adani Enterprises, NTPC, Tata Steel and ONGC falling over 5-7%. Adani Group stocks, which got hemorrhaged last year around this time, dropped like a rock on Wednesday too. All the 10 scrips traded in the red, wiping out Rs 90,000 crore off their combined market capitalisation.
Mid and small cap indices have outperformed the Nifty 50 by 30-50% in the last one year, perhaps led by strong fund flows that touched a cyclical high. In contrast, large cap stocks saw outflows hitting a cyclical low. As a result, mid and small cap stocks were trading at a significant premium to large cap.
The good news is that analysts reckon that mid and small caps aren't really up to their necks with trouble, but agree that the ongoing correction in prices is much-needed. Besides valuation concerns, they see no other fundamental dangers lurking around that could dent India's long-term growth image.
Meanwhile, Asian markets remained mixed, thanks to a modest decline in the US market on Wednesday.
The pace for the rest of the week will likely be dictated by the US February retail sales data and weekly jobless claims data due Thursday. Broadly though, the belief persists that the US economy is sleep-walking into a slowdown, and potentially into a recession by the second half of 2024.
This means gold and long-dated Treasuries may remain strong, while equities may have to brace for volatility. Even though the dollar remained steady, the rupee remains the best performing Asian currency in 2024, having strengthened 0.4% against the dollar so far this year.
Moreover, it is an election year for several economies including India.
Compared with several other emerging and advanced economies, India's growth metrics appear relatively robust. The anticipated cyclical upturn, a full-blown capex cycle, robust demand and expected interest rate cuts in 2024 may all help prevent investors' faith from going sour.
