Small-caps set for biggest rally in nearly 10 months on rising demand

Shares in the broader market are witnessing huge buying interests and are poised for their biggest gains in nearly 10 months. 

In the past one month, the Nifty SmallCap 100 index has rallied 11 per cent — the most since September 2019. In September, it had gained 11.2 per cent through the month following the government’s decision to lower corporation tax rates. 

Another few basis points of gains would mean that the rolling 1-month returns for the Nifty SmallCap index would be the most since March last year. The Nifty MidCap 100 index, too, has seen a sharp uptick, rising close to 7 per cent in the past one month — the most since November. The Nifty, an index of blue-chip stocks, has gained only 1.6 per cent over the past month.

The latest outperformance in the broader market comes after two years of sharp underperformance vis-a-vis large-caps. This underperformance had led to a huge valuation differential between the stocks in these universes.

Abhiram Eleswarapu, head of equity research at BNP Paribas Securities India, says that while the Nifty has been trading at a premium to its long-term price-to-earnings (P/E) averages, the mid- and small-cap indices have been trading a discount to their historical multiples. The latest rally has helped the indices in the broader market close the valuation gap with regards to their historical averages, he says.

Compiled by BS Research Bureau

Many others believe easy global liquidity would mean that stocks in the broader markets could continue to gain. However, the extent of outperformance, going ahead, will hinge on the domestic economy.

“We expect the valuation gap between mid-caps and large-caps to narrow, depending on the macro recovery. If growth becomes broad-based from here, mid-caps could continue to outperform the Nifty in the coming months,” says Jitendra Gohil, head of India equity research, Credit Suisse Wealth Management.

Buying in the broader markets has been across the board, with over 80 per cent of the stocks in the Nifty SmallCap100 and Nifty Midcap 100 indices have gained over the past one month. Some of the major gainers in the SmallCap index include Indiabulls Real Estate (up 68 per cent), Avanti Feed (up 42 per cent) and IRB Infrastructure (up 42 per cent). Meanwhile, Jindal Steel, Steel Authority and PNB Housing are top gainers in the MidCap index — each soaring more than 25 per cent.

Vinod Karki, vice-president (strategy) of ICICI Securities, observes that investor preference has shifted to low-beta stocks from high-beta. Low-beta stocks are gain/fall less than the benchmark, while high-beta ones gain/fall more than the benchmark. Given their “high margin of safety”, small-caps and mid-caps have outperformed in the past one month, he says.

“Such rallies have been driven by optimism on policy measures, improving growth outlook, rising liquidity and low rates,” says Karki, adding any negative global event could hurt markets.

“We observed the first big threat to the current rally following the flare-up in standoff in US-Iran relations which resulted in spike in oil prices and sell-off in risk assets globally. Above experience provides ample evidence that a global shock could increase risk aversion thereby halting the global risk-on rally,” he adds.