Rising Momentum in Small-caps?


There is bit of tussle between two sects of the market. On one side, you have the quality enthusiasts like the coffee-can clubs who discredit the current rally in the small and mid-caps as something that will fizzle out once budget jamboree is over. And, on the other side, there are these broader-market bulls who believe that the worst is over for the small-midcaps and hope that the best is yet to come. They take comfort from the fact that even in days (in the last three weeks) when Sensex was down, the broader markets were inching up. This, coupled with the fact that the small-cap index has returned over 7%+ in the month of Jan against a very flat return for Sensex and Nifty, have added ammunition to their argument.

Only time will tell who will turn out to be right. Of course, lackluster budget has taken some steam out of the ongoing rally in small-mid caps. But it is unlikely to reverse the stronger trend, esp. when the lead indicators such as perk-up in power generation, turn in coal production, increase in port traffic, surge in manufacturing PMI (Purchasing Managers Index) for Jan etc. are pointing to a convincing turn in the economic activities. More importantly, this govt. has penchant to announce more powerful reforms outside the budget, like how it did the privatization of coal mining very quietly in early Jan without much fun-fare. If the govt. continues on this track by announcing more such reforms (like the impending legislation on the new labour code etc.), then one could be looking at a stronger year for small-midcaps. More so, if the following technical trends are anything to go by.

  • Selling intensity in small-caps have substantially subsided. There is evidence to believe that the infinite supply (persistent selling by HNIs and funds) that squeezed small-caps last year has played itself out and that in itself will act as a big push for small-midcap rally this year (without even factoring the “buying” that may come in).
  • In an encouraging change of trend for small-cap index, after making many attempts in the past to gain momentum, this is the first time after several months i.e. post July last year to be precise, it has successfully broken out of the range it has been stuck since then.

But there is a risk of Known-Unknown from Corona outbreak. One doesn’t know how this will play out. If it worsens, this could cloud the outlook in the short-term.

Happy Value Investing!