Smallcap stocks are now talk-of-the-Street after the massive rally it's seen since March. Majority of investors, mutual funds and portfolio management services (PMS) have replaced their bets with smallcaps. In the last five months, the Nifty Smallcap100 index has zoomed over 80 percent, outperforming the benchmark indices.
Since March, Sensex and Nifty50 indexes surged 53 percent and 55 percent respectively. Meanwhile, the Nifty Midcap100 index rose 62 percent during the same period.
Stock market analyst Basant Maheshwari said the biggest returns can be made by buying a smallcap.
"When we talk about stocks, we will say smallcaps made money. For example, Eicher Motors, Page Industries, Infosys, Pantaloon Retail and Sun Pharmaceutical. So, the thesis would be all of them were sector leaders as smallcaps. Small caps which are not leaders of the sector, normally die prematurely. So, that is my biggest apprehension buying a smallcap," Maheshwari added.
Recently, Morgan Stanley said the smallcaps will see an upsurge in the near future. The broader market's relative performance is helping as a forward-looking stock market is possibly anticipating better growth. And with monetary aggregates normalising and significant policy action underway with a corporate tax cut last September, the brokerage believes growth is set to turn.
It added that smaller firms are likely to benefit more due to their operating and financial leverage. The valuations for smallcap stocks are looking attractive relative to GDP and money supply, setting the stage for outperformance versus large cap stocks in the coming months, it explained.
Motilal Oswal Predicted Smallcaps' Rally in January
On January 28, Motilal Oswal in its report stated that smallcap space is the next big opportunity for the Street.
It said, "We certainly believe now is one such opportunity. Clients who have invested in smallcap portfolios in calendar years 2017 and 2018 have seen large drawdowns in line with the index. Higher drawdowns have tested many investors but as history suggests, increased allocations at these junctures and staying put far outweigh the benefits over breaking down at this stage."
There have been three instances (January 2004, January 2009 and January 2013) in the past where the market stood at its bottom, consequently marking the next up-cycle in small-cap space, explained the brokerage.
Smallcap PMSes Clock 13% Gains in July
As many as 44 PMSes of the 180 tracked by PMS Bazaar beat the index, and out of the top-10 best performing PMSes, three were smallcap funds namely Nine Rivers Capital, Right Horizons and Accuracap.
These PMS funds in July generated up to 13 percent gains for their investors. Nine Rivers Capital Smallcap fund's top holding included Intellect Design, Poly Medicure, Astra Microwave, CDSL and Alkyl Amines Chemicals.
Nine Rivers Capital's founder Sandeep Daga explained to PMS Bazaar that there are so many smallcaps of yesteryears that are mid/large caps now! Naming a few, he listed out stocks like Bajaj Finance, Hawkins, Shree Cement, Honeywell Automation, Titan and Eicher Motors.