A Bridge Too Far
Dalal Street Investment Journal|April 13, 2020
The gap between large-cap companies and small-cap companies is growing. Is there a tangible reason for this difference? Dalal Street Investment Journal investigates.

Research and news headlines often point to the idea that traditional large-cap companies cannot innovate and small-cap companies will render many large-caps extinct. Owing to the digital revolution, there have been numerous start-ups over the years that upon entering the market have not only caused disruption but become megacorporations of today. Are traditional large-cap companies of today at risk of becoming increasingly displaced by newer technologies? Or are these heavyweights more than capable of standing their ground? Before taking a call on this, it is important to consider how these companies have performed in the recent past.

We find that over the last two years, all three, namely, the small-caps, mid-caps, and large-caps, have shown typical traits that embody them. As the country’s economic growth slowed, the BSE small-cap and mid-cap indices lost 24.69 per cent and 18.53 per cent respectively, while the BSE large-cap recorded a relatively modest decline of 8.48 per cent. We can see that while the overall economy passed through a slowdown, it was the small-cap and mid-cap indices that took the biggest hits.

Even if we consider 2019 specifically, before the outbreak of the coronavirus, the BSE Mid-Cap index had slipped by 3.05 per cent and the BSE Small-Cap by 6.85 per cent, even as the bellwether S & P BSE Sensex gained 14.38 per cent. Consequently, the price-ratio (or the ratio of respective indices) between the mid-caps and the Sensex had dropped to 0.069, the lowest in a decade as compared with the 10-year average of 0.086, according to Bloomberg data. The market-cap proportion of ‘A’ group shares on the exchange had surged to 94 per cent, the highest since 2000, as against the long-term average of around 84 per cent Investor preference for large-cap stocks over the years has caused a chasm between the market capitalisations of these scrips. In fact, the market-cap between the large-caps and small-caps is at a two-decade high. From the mid1990s, the size difference between the large and small increased continuously and rapidly, except for during the recession years of 2008-2009. So contrary to the popular notion, it is found that large-cap companies are more likely to maintain their dominant position while small corporations often tend to stagnate or even wither away.

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