India Mid-Cap Stocks Head For Correction As Growth Outlook Sours

A blistering rally in mid-cap stocks is on course to enter correction territory, as investors become increasingly concerned over slowing earnings growth and elevated valuations.

The Nifty Midcap 100 tumbled as much as 2.9% Friday, extending its drop from recent high to more than 10% — the parameter for a so-called technical correction. Heavy selling by foreign portfolio managers this month fueled the downturn in the index, which had rallied about 30% through September 23.

The rapid change in fortunes for Indian stocks came as a rally in Chinese shares gathered steam, following a central bank stimulus blitz in late September that sparked a frenzy of buying. Slowing earnings growth in India also weighed on sentiment.

While foreign investors have soured on local shares, domestic institutions have poured in billions to absorb their selling.

Global funds have sold stocks worth nearly $9 billion in October so far, reducing the annual inflows to $2 billion. Buying from Indian funds and insurance companies has topped a record $50 billion, helping the mid-cap stocks still show gains of more than 19% for the year.

“There was, and is, very little margin of safety in the valuations,” said Sanjeev Prasad, co-head of institutional equities at Kotak Securities Ltd. in a note this week. “There is no change in our cautious view despite the recent correction in the market,” he said.