Small-caps record run to continue: Analysts

See global liquidity and retail interest boosting index

Small-cap stocks have been on a roll in the past few months with the S&P BSE Smallcap index hitting a record of 20,290 points in Thursday’s intra-day trade. The index surpassed its previous high of 20,183 that it touched on January 15, 2018.

Despite this, analysts see more potential gains for stocks in this segment as economic recovery gathers steam, which they believe, should be beneficial for companies in the midand small-cap space. Moreover, the accommodative stance of most global central banks amid low interest rates will ensure that money continues to flow into emerging markets (EMS), including India. Stock selection will be key as there could be a correction, analysts say.

“There is ample liquidity all around with global central banks remaining ‘accommodative’. With the economy opening up, companies are back in business and the demand for products is steady. All this augurs well for companies, especially in the mid-and small-cap segment. That apart, the retail investors have latched on to the small-caps and are partly responsible for driving up prices,” explains G Chokkalingam, founder and chief investment officer at Equinomics Research.

Most experts believe the interest of retail investors in the markets, especially in small-caps, is here to stay — at least for now.

“When retail share of equities trading went up from 50-55 per cent to 65-70 per cent in May 2020, it was widely believed to be driven by forced savings during the lockdown and availability of free time. However, even after the economy has more or less opened up, activity levels have not reduced and growth in demat accounts has, in fact, accelerated to 30 per cent YOY from 10-15 per cent a year back. It, thus, appears likely that direct retail participation in equities would persist for a while,” wrote Neelkanth Mishra, managing director, India strategist and co-head of equity strategy for Asia Pacific at Credit Suisse, in a February 23 note co-authored with Abhay Khaitan and Prateek Singh.

Among stocks, Majesco, Hindustan Copper, Magma Fincorp, IIFL Finance, and Onmobile Global have more than doubled in the past month alone. Public sector banks like Bank of Maharashtra and Indian Overseas Bank have zoomed 87 per cent and 77 per cent, respectively, on privatization buzz.

“Only 10 per cent of retail portfolios are in sub-$1 billion stocks, but their share of ownership (24 per cent) of these is larger than that of $1 billion-plus stocks (13 per cent). With 54 per cent of free-float of the sub-$1 billion stocks, elevated retail activity should be supportive of small-/midcap stocks and indices. As economic revival gets more broad-based, these firms should also get earnings support,” Mishra wrote.

The frontline indices – the S&P BSE Sensex and the Nifty50 – have surged 92 per cent and 94 per cent, respectively, since their March lows. The rally in mid-and small-caps has been sharper with both these indices rallying 106 per cent and 128 per cent, respectively.

However, experts do caution against valuations at this stage. Besides, rising commodity prices and bond yields remain key risks. A clear risk emerging from the December quarter earnings season, according to analysts at UBS, are rising commodity costs.

“I would still remain more comfortable with large-caps than smalland mid-cap stocks due to excessive volatility, inadequate ESG disclosures / strategy and risk from variation in overall economic growth / interest rate environment. However, there are always good exceptions,” says Jigar Shah, chief executive officer, Kimeng Securities India.