Smallcaps: A silver lining

Indian equity markets present a striking paradox.

- DEBASHIS BASU

Mega companies are struggling with their businesses as if India is in a recession, yet their stock prices remain firm. Scores of small firms are doing extremely well, as if the Indian economy is growing at 10 per cent or more, but their stock prices are languishing. How will this paradox be resolved? In my view, we may now see an outperformance by quality smallcap stocks and possibly continued stagnation in largecap stocks.

The Indian equity markets have underperformed most global markets since the peak in September 2024, after an 18-month bull run. During this run, the bulls refused to be reined in even by the underwhelming performance of the ruling party in the June 2024 general elections. After a day of shock at the results, the markets resumed their upward march — until headwinds started emerging later in 2024, followed by an 18-month phase of underperformance. However, if you look at the large companies in the Nifty or CNX 500, this underperformance may not be obvious. While the Nifty was down 2 per cent between early September 2024 and late January 2026, the CNX500 was down 5 percent. But over the same period, the Nifty microcap index was down 17 percent. The median returns were far worse.