Small-Cap Recovery: Shifting The Goal Post?


An eventful year is coming to a close. From market point of view, 2019 couldn’t have been more unique. It marks the first time in almost 2 decades that the BSE small cap index has delivered negative returns for two years in a succession. 2019 witnessed that rare event. Last time, such an event occurred was in 2001-02. In rest of the downturns, be it in 2008 or in 2013, the corrections in small-caps did not last beyond 13 months. As the year began, this recurring pattern prompted many experts to predict a sharp rebound in small-caps in the later part of 2019, which, of course, did not materialize, much to the disappointment of seasoned small-cap investors.

As the New Year begins, the goal post (of small-cap recovery) has now shifted to early or mid-2020. There is reason for optimism this time. If one goes by past cycles in the last 35+ years, one would not find a single down-cycle that lasted well past two years. Given this, it is very unlikely that the winter in small-caps will stretch beyond few more months at worse. More so, if one considers the following factors:

  • It has been nearly 4 months since the small-cap index has not gone back to test its earlier low level. This may be pointing to a slow and steady trend reversal.
  • Stability returning to financial sector with signs of improving liquidity in the banking and NBFC space.
  • Increasing reform momentum from the Govt.
  • Low base effect supporting moderate earnings growth in FY21.
  • Friendly taxation measures (either on DDT or LTCG) expected in the upcoming budget.
  • Lower interest rate environment.

Will 2020 belong to small and midcaps? Are small-cap & mid-caps at an inflection point? Hope we will find the answers not too far in the future.



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