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

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

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• 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. 

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• A combination of factors contributed to small cap
  stocks going from being stock market darlings to
  fallen angels. SEBIs 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. 

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• 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. 

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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.

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Thank You

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