Australia
China
India
Indonesia
Japan
Malaysia
Philippines
Singapore
South Korea
Taiwan
Thailand
Vietnam
With China’s waning popularity, India has become an investor favourite over the past years. The performance speaks for itself. When looking at India’s Sensex in USD terms, it gained 160% over the past ten years. The Nifty Small Cap 100 soared 55.6% in 2023, the Nifty Small Cap 250 48.1%, while the Nifty 50 index gained 20% in the same period.
“It is a huge country with an almost ideal population-age structure from the investor point of view and high catch-up potential,” says Björn Jesch, Global Chief Investment Officer at DWS. “An energetic government is driving forward reforms and investment, and India is increasingly integrating into global trade, particularly through growing service exports and further opening of the bond market.”
However, India’s small caps corrected recently. The Nifty Small Cap 250 lost nearly 10% in the three weeks following Febuary 27, the day the Securities and Exchange Board of India (SEBI) directed mutual funds to take measures to protect investors from the speculative froth in small- and mid-cap stocks.
What is more, “the median return of the top 250 small cap companies by market cap was just 3.8% in the four-month period from Dec 2023 to Mar 2024 versus Nifty’s 10.9% rise. Further, about 34% of the top 500 companies and 42% of the top 250 small cap companies have given negative absolute returns during this period,” as per SBI Mutual Fund.
The Indian asset manager sees various factors contributing to it. For instance, the relative valuations of large caps are becoming attractive after the sharp rally in small and mid-cap companies over the last year or the regulator’s increasing concern over potential overheating in mid and small caps.
“In summary, there is a lot of turbulence beneath the surface which is masked by the strong performance of the benchmark indices. The flip side however is that we have already seen a round of indiscriminate panic selling in mid- and small caps. While the turbulence may yet continue for similar reasons, we think increasingly the market will become more discerning and reward companies which have strong business models, long-term earnings growth visibility and sustainable cashflows across the market cap spectrum,” says SBI.
Shift away from Indian small- and mid-cap stocks?
Since the low on 18 March 2024, the Nifty Small Cap 250 has recovered and gained 10.1% to date (9 April). Kotak Securities analysts said that the recovery is beyond expectations. “The technicals are projecting that the indexes may hold the levels for some time before consolidating.”
DWS advises investors to be cautious. “As in other markets, small caps – and investment vehicles targeting them – can be risky not only because of lower liquidity in the underlying stocks but also due to less regulatory or investor scrutiny and corporate governance concerns,” says the German asset manager.
Goldman Sachs predicts a shift away from small and mid-cap stocks and says investors should pay more attention to Indian large-cap stocks. “One of the key views we have coming into the year is that you should see a rotation in the markets. It was the year of mid- and small-caps, and that seems to be changing already over the past month,” Goldman Sachs’ Asia-Pacific portfolio strategist Sunil Koul told CNBC.
