2021: Year Of Small-Caps?

Smaller stocks may outperform the others this year. The rise can be 30 percent more than in headline indices

- Yagnesh Kansara

AS a rule, analysts rarely recommend small-cap stocks. They are fraught with dangers because of several factors. Low trading volumes, and high promoters’ holdings, imply that they are amenable to volatility risks, and quick and easy manipulations. Most of them are lowly-priced and derided as “penny stocks”. In times of a rally, like we have seen over the past several months, unscrupulous promoters influence stock prices to raise capital, and quietly vanish from the scene.

But, at the same time, if investors choose carefully and cautiously, small-caps hold great growth opportunities. More importantly, as we begin 2021, several experts seem gung-ho about these shares. “We expect small-caps to outperform the others in 2021,” says a confident Satish Kumar, Head (Equities), Equirus Securities. S Ranganathan, Head (Research), LKP Securities, adds, “It is the small-cap space that has a lot of catching up to do with its (mid-cap and) large-cap counterparts.”

When one looks at the respective indices, the Nifty and Sensex, which comprise larger stocks, scaled historic highs last year. The Nifty Mid-Cap 100 hit the 21,000 mark for the first time since January 2018. Its deviation from the large-cap indices narrowed down to 1.7 percent.

However, as Kumar explains, the index for the smaller stocks is “still underperforming by almost 29 per cent”. Hence, he believes that there is a “big catch-up trade in this space”.