Here Is Why Small Cap stocks Are Leading Surge In Equities?
                     Here Is Why Small Cap 
stocks Are Leading Surge In 
Equities?
 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. 
 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.
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-leading-surge-in-equities