Smallcap stocks to likely outperform in short term; largecaps may face pressure: Heres why

Even though the valuations of largecaps has come down sharply amid the recent correction since September end, even as the headline indices Sensex and Nifty are showing a choppy trend, the broader markets are resilient.

Infact, the Nifty Smallcap 100 and Nifty Midcap 100 indices are in an uptrend for the past eight sessions, logging gains of 8 per cent and 5.7 per cent, respectively.

Nevertheless amid such a trend, there is a belief that the smallcaps will outshine the largecaps in the short term. 

This is as foreign portfolio investors (FPIs) or foreign institutional investors (FIIs) will continue to offload Indian equities and as FIIs are largely invested in the large cap segment, G Chokkalingam-Founder at Equinomics believes large cap stocks  are likely to remain under pressures. Nonetheless, he expects small cap segment to outperform in the short-term for the following reasons:
 

• Despite erosion of over Rs.34 lakh crore of overall market cap, over 65.45 lakh new investors entered the capital markets since last week of September 2024. In the last 52 weeks alone, over 4.93 crore new investors entered the Indian capital markets for the first time. Last week also, nearly 8 lakh new investors registered on the BSE platform. This week, total investor base is set to breach 20 crore mark. We believe that a large part of new retail investors generally prefer Small & Midcap space;
• Though BSE Small cap segment’s trailing PE stands at elevated level of 32 as compared to 22 times for the Sensex, individually many several stocks within SMC segment have fallen anywhere from 10per cent  to as high as 50 per cent from their respective 52-week highs. BSE Small cap index constituents have lost over Rs.13 lakh crore (14 per cent) of their combined market cap in the last two months. While “perception-driven” SMC stocks have crashed even up to 65 per cent, quality SMC stocks have fallen anywhere 10 per cent to 20 per cent within 2 months. Hence, several quality stocks in the SMC segment have become appealing buys, in his view;

We firmly believe that, the small cap segment holds many growth stories, acquisition possibilities and also unique stories in terms of Deep Values like Investment Holdings, Replacement Value of assets, Unlocking Possibilities from Land Banks, possibilities of FIIs entering after the small cap stories play out successfully, etc, adds Chokkalingam.