Over two-third of small-caps have become multi-baggers in the last 4 years

Multi-Bagger stocks mean the stocks that provide returns that are several times the amount invested in them.

Since the stock market bottom of Covid over two-thirds of small-caps have become multibaggers- stocks that provide returns that are several times the amount invested in them, revealed a report by DSP Mutual Fund. 

Performance of top 500 AMFI basket stocks ( From March 2020 to Febraury 26 2024)

One-third of companies have outperformed the Nifty Index and only 10 per cent of the firms gave negative returns. The Top 20 performers ran at a compounded annual growth rate (CAGR) of 76 per cent, on average. This means tripling every other year.

A sneak-peak at history (2003-07 Bull run)

1. More than three-fourth of all stocks had become multibaggers.

2. Only 6 stocks had given negative returns.

3. Top 20 performers ran at a CAGR of 160%, on average.

NSE 500 Index TR CAGR: 58%

Nifty 50 Index TR CAGR: 53%

Equity risk premium has evaporated

What is Equity Risk Premium?

The equity risk premium is the excess return an investor expects to receive for investing in stocks (equities) compared to a risk-free investment, such as government bonds. It's a way of compensating stock market investors for the additional risk they take on, which is historically more volatile than government bonds.

How is Equity Risk Premium Calculated?

The most common way to calculate ERP is: Equity Risk Premium (ERP) = Expected Return on the Stock Market - Risk-Free Rate

What does it signify?

The size of the equity risk premium changes over time depending on the perceived level of risk in the market. Interestingly perceived risk & the risk that unfolds in real-time are often at the opposite end. The lower the risk perception, the higher the complacency and more are the chances of sub-par investment returns.

"The last time equity risk premium (difference in earnings yield of stocks versus bonds) was so low was at the peak of the market before the global financial crisis of 2008. This doesn’t have the ability to signal any upcoming crisis but indicates a similar disregard for risk," said Sahil Kapoor, Head of Products & Market Strategist, DSP Mutual Fund.

Stocks, Commodities & FX – All markets are witnessing multi-Year low volatility readings

As seen in the chart above, equity markets have in the past entered a period of ‘unsettling calm’ with very shallow drawdowns followed by persistent up moves. It’s not just equity markets, even currency and commodity markets are witnessing a calmer market environment. "This is usually a great sign for mid-cycle bull markets in stocks. However, complacency can quickly set in, especially when stock valuations are stretched, global growth is patchy and global trade is slowing," noted the DSP MF report.

Intermarket volatility correlations are a great way to measure the risk perception of investors across assets. At this time, investors aren’t worried, are excited about high returns and there is little regard for downside protection.

"These are conducive conditions for unseen events to disrupt the ‘unsettling calm’," said Kapoor.