The Sensex crashed over 1,000 points on Wednesday and went below the 73,000 level before making some recovery while the Nifty slid by over 1%. The smallcap and midcap indices fell the most, with the BSE smallcap index going down by over 5%.
While the Sensex closed 906 points down to settle at 72,761, the Nifty was down 338 points and closed three points short of 22,000. Over 13 lakh crore of investor wealth was wiped out in the day's trading session.
Analysts have attributed the fall, which is coming at a time when the S&P500 had hit a record high, to liquidity overflowing and valuations in the smallcap and midcap indices being stretched.
Market expert Ambareesh Baliga said, "The valuations were expensive and the stocks continued to move up because of liquidity. People were making money so they were putting in more funds, because of which the stocks were going up. It was not because of valuation. But now, In the past week, we have seen that the regulators are worried about the valuations."
"This has percolated down even to the mutual funds, who have started restricting fund flow into the small and midcap funds. I think that is what is playing out," he added.
Mr Baliga said there has been a certain amount of correction, like the 5% drop in the smallcap index. This, he said, points to some of the smallcap stocks correcting between 20 and 40% in some cases.
"And I think that has created some amount of panic among those who had seen only profits till date in the past so many months. I think the first sign of huge losses has started causing panic. And when you have this panic, you stop investing further. So the liquidity, which was driving up the stocks, has started drying up. I think this could be just the beginning, we could see some more correction from here as the liquidity dries up further," he warned.
The expert said retail investors should book their profits or losses and start moving into large-cap stocks, because they are more stable and the valuations are still not expensive. "Do not invest based on tips," he said.
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