BIG Bang in Small Stocks

Stock markets are upbeat with mid-cap and small-cap stocks on a rally that looks sustainable given the macroeconomic factors but, there are some ‘cats and dogs’ on the prowl

- Yagnesh Kansara

Stock markets are pathologically pragmatic. They see a lot of sun even when dark clouds swirl on the horizon. It is perhaps this inherent positivity that keeps the markets going.

The second Covid wave has phased out and a third wave is feared round the corner, but the markets are looking forward to an impressive earnings growth, despite the mounting uncertainties. The main reason for this market dynamics stems from the fact that investors are rushing inexorably for equities in the absence of high-yielding investment avenues and a low-interest rate regime. Stocks are known to beat inflationary pressures.

India VIX, a volatility index based on the Nifty index option prices, has fallen from its highs of 80 in early 2020s to as low as 15. It indicates a receding fear among investors. Similar trend of one-way growth has been seen in the small-cap and midcap space since April last year.

More than a year later, investors wonder if the small-cap and mid-cap space is still left with some fire in it.

“These small and mid-cap stocks were pressured for long. There was scanty growth. But the picture has changed now. Cost-cutting measures adopted by these companies during the pandemic pushed their bottomlines up,” points out S Ranganathan, Head of Research at LKP Securities. “Markets are poised to scale new highs. The broader markets will continue to outperform the benchmark Nifty and Sensex.”