Nifty 50 set to erase 2024 gains as regulatory warning jolts small and midcap stocks

The risk-off sentiment in the market was triggered by the Securities and Exchange Board of India () last week when it raised concerns over the valuation froth in the broader market and the rising inflows into midcap and smallcap funds.

The regulator also asked asset management companies to conduct stress tests, the results of which were released by most of the fund houses last week.

Concerns are growing that India, which has been a favourable destination for foreign investors within the emerging market basket, could take the backseat amid the regulatory headwinds.

Some foreign brokerages, who until recently were bullish on India, have toned down their enthusiasm. Macquarie Capital in its note said that the recent actions by Sebi have raised concerns among investors.

Domestic brokerage PhillipCapital has warned of a steep 3,000 points correction in 50 as it sees signs of exhaustion noting that the markets remain 'highly overbought' in the long-term time frame.

The index could plunge to 18,550 points in what could be a timewise correction that may last for a minimum of three quarters, according to PhillipCapital’s prediction.

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ICICI Securities also said that its ‘size allocation’ framework has been signaling that are at their most unattractive relative valuation zone in terms of their risk premium over largecaps.

In case any major unknown risk-off macro event was to play out, then small and mid-caps currently offer a low margin of safety in terms of their ‘earnings yield spread’, the brokerage firm said.

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