The Nifty Midcap100 index in 2019 declined around 4 percent while Nifty Smallcap100 plunged 10 percent. Despite a bigger correction than mid-caps, Motilal Oswal's asset management division believes that buying small-caps at the right time has resulted in significant outperformance over large-caps.
From its peak, while the Nifty 50 is down around 7 percent, Nifty Smallcap 100 is down 43 percent. For two consecutive financial years, small-caps have underperformed large-caps but that might not be the case anymore.
Motilal Oswal, in its report has said, “We certainly believe now is one such opportunity. Clients who have invested in small cap 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.”
As per the table, 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. Currently, the market is again at its bottom, with the ratio exactly at 0.5x.
“The ratio of 0.5x assumes significance as it happens to be the near bottom of the down-cycle and an imminent upturn. It is often advocated that timing the market is not wise –however when it comes to small-cap stocks, entering at the peak of the cycle has proved detrimental”, the brokerage added.
First Published: Jan 27, 2020 2:10 PM IST
