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65Here Is Why Small Cap stocks Are Leading Surge In Equities?Sep-02-2020

Here Is Why Small Cap stocks Are Leading Surge In Equities?

Blog by – Mr. Ashish Ajmera

Equity trading is primarily characterised by broad direction in the market as well as the behaviour of stocks from different segments like large cap, midcap and smallcap. Each move in the stock markets, be it a downmove or an upmove, offers opportunities of a different kind. The stock brokers in India come up with plenty of analysis and recommendations about the equity markets from time to time though it is always preferable to keep abreast of the basic undertone of the market and try to approach equity trading in a way that is most optimal for your long term financial goals. This is where choosing from the various best online advisors becomes very important. The changing characteristics of the equity market trading are often visible after major corrections. The bloodbath in the local and global stock markets in March-April 2020 and the subsequent rebound has also displayed similar tendencies with small cap stocks coming to the foray for the local investors.

After a subdued performance since last two years, small caps are now comfortably outperforming their peers. From its March 2020 low, the Nifty small cap 100 index spiked around 75% compared to 54% rise in the Nifty 50 till the third week of August 2020. Since January 2018 when the nifty small cap 100 index hit its all-time high levels, till March 2020, the index had tumbled by nearly 67%. Prior to this, the small cap stocks witnessed a massive bull run in 2017 which led the small cap index to hit their all-time high levels in the beginning of 2018. Year 2017 was exceptional for the markets where small turn out to be big with minnows dominating the stock markets, giving handsome returns of up to 56.56% for investors and outpacing their bigger peers quite convincingly. 

In the 5 years preceding 2013, the global economy was fighting recession, with Nifty midcap index and small cap index losing 8-10% in 2013. During this period, the companies of scale and proven record of management held nerves, which is why benchmark indices like Nifty outperformed the smaller companies. However, from 2014 onwards, with a stable government in the centre, business optimism improved drastically. The boost to infrastructural projects and allied reforms, loosened several debts burdened areas. This has had a multiplier effect on the economy, which meant that not only did, realty, infrastructure housing, construction ancillaries went up, it also shored up overall expectation of better days. Equity market trading in India also saw good support with the smaller and medium companies witnessing good demand.

Between January 2014 and December 2017, the Nifty small cap 100 index rallied 177%, while there was 169% surge in nifty midcap 100 index and 101% gain in Nifty 50. The small-cap index scaled its record high of 9656.55 on January 15, 2018 and the mid-cap index hit its lifetime peak of 21785.60 on January 9, 2018. However, from Feb 2018, small cap index took a bigger hit compared to their bigger peers, with nifty small cap 100 index falling up to 29% in CY 2018. 

Also Read: What is Equity Trading? Meaning, Benefits and Types

A combination of factors contributed to small cap stocks going from being stock market darlings to fallen angels. SEBI’s decision asking mutual funds to classify the holdings of their schemes as large, mid and small cap stocks, aggravated the sell-off as fund houses rationalised their schemes to comply with the directive. A slowing economy, interest rates remaining high despite RBI cutting rates, Brent crude oil prices hitting their highest level since November 2014 and a string of corporate bond defaults all accelerated the flight to safety with investors preferring to pay high prices for top tier companies and ignoring second-line stocks altogether.

The year 2019 turned out to be eventful for the large and mid-cap indices whereas small cap stocks continued to remain in slow lane. The year 2020 began on optimistic note. The US and China signed a partial trade deal. The Fed started slashing interest rates three times from July 2019 to insulate the economy but signalled a pause unless the economic outlook changed. 

From January 2018 when the Nifty small cap 100 index was all time high till Jan 2020, the index fell by around 34.5% compared to Nifty mid-cap 100 which declined by 16.75 to 18136.70 and Nifty 50 which actually surged by nearly 16%. However, the market dynamics changed the course post January 2020. From record high in January 2020, the Nifty fell by 39.57% to 7511.10 whereas nifty midcap 100 fell by 40.73% to 10749.95 and Nifty small cap went down by 49.36% to 3202.90 on March 24, 2020. Within one month of their low levels in March 2020, the Small-caps outrun their mid- and large-cap peers. 

Shares of smaller companies have been laggards since January 2018 — when the sell-off in them started. The MidCap and SmallCap indices are nearly 22% and 38% away, respectively, from their January 2018 peaks, while the Nifty is just around 6% away from its record high hit in January this year. The outperforming of small cap index is an indication of higher risk appetite in the broader market. Small caps hit a bottom in March when the Nifty hit a low of 7,500 and the most beaten down stocks have surged since then. This is partly because of strong participation from retail investors and extreme value in broader markets. Major stock brokers in India have witnessed increased participation of new retail investors over last few months and are likely to search advisory from good wealth advisors. The spurt in small caps is likely to catch further frenzy in such a scenario. 

Conclusion

The local stocks moved up in recent months despite of negative economic growth prospects and slow worries over demand revival in the economy. For small-cap stocks, it is expected that in coming few quarters, the companies will improve their earnings on the back of various measures taken by government and RBI for economy. The gains in mid- and small-cap shares have been led by a decent mix of sectoral plays. Majority of the winners in recent spurt in small caps belong to financials, textile, chemicals, technology and pharmaceutical sector. Given the price action over the last decade, the domestic small-cap stocks hold the potential to bounce back further from hereon. In March, the Indian equity market recorded its second sharpest monthly fall since October 2008. This crash is giving a good opportunity to investors to add good quality names stocks in their equity market trading. The sharp correction has provided an opportunity to rebalance their portfolio. Small cap stocks could continue to outperform if the economy gathers steam, inflation picks up, and appetite for risk improves.

Also Read: What Does Budget Offer For Your Equity Investments?

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