The recent performance of the Sensex, BSE Mid Cap, and BSE Small Cap indices since the Covid fear peak in April 2020 sheds light on this investor behaviour. While the Sensex returned a respectable 33%, the BSE Mid Cap outperformed at 42%, but it was the BSE Small Cap that gave an astounding 53% return. Naturally, such stellar returns in the small-cap index open doors to numerous small- and micro-cap stocks experiencing exponential growth.
A telling anecdote illustrates the current market frenzy. A long-forgotten stock from the 2008 bull run now boasts a defence tag and has seen its share price go berserk, reaching heights last seen in 2007. With a market cap of ₹600 crore against revenues of just ₹30 crore, this stock mirrors the euphoria surrounding the Indian DefTech cycle. In the market, we witness companies hastily adding ‘Defence’ or ‘AI’ to their names or investor presentations, reminiscent of the past buzz around infrastructure, information technology, software, and the internet.
A look at the three-year rolling return of the small-cap index since the post-global financial crisis period of April 1, 2010, reveals an intriguing pattern. Historically, when this index reached approximately 35-38% returns, sharp corrections followed, resulting in negative rolling returns. It fell all the way to minus 20% during the days of taper tantrums towards the end of 2013. The other period of negative returns was during the Covid panic in 2020. However, this time, without any substantial correction, the small-cap index has surged beyond 40% plus, hitting a 13-year high. Although history suggests a correction will occur sooner or later, the crucial question remains: When?
While the Nifty trades near 20,000, signs of a melt-up frenzy synonymous with the peak of bull markets have not yet fully emerged. The first-quarter earnings season presents a mixed picture with the tech sector reflecting global concerns and FMCG grappling with rural distress. Standout performers include the banking sector, especially PSU banks, and defence and engineering stocks, although PSU banks remain undervalued even after a recent rally. The much-anticipated correction could well be signalled by a melt-up in the PSU bank index, marked by SBI’s rapid ascent above ₹700 post-results.
Postscript: A conversation with a technical analyst provided an intriguing perspective. They are the ones who look at charts without any idea of the underlying. Seeing the returns chart make lower bottoms and higher tops, breaking out of a range, the analyst anticipates a super bullish scenario with expectations of 50%-plus returns before the inevitable correction sets in. However, caution is warranted, for as the saying goes, the trend may not always be your friend.
Currently, at its 13-year peak with a remarkable 38%-plus CAGR, one wonders if the market is poised to venture into an astonishing 50% CAGR on a three-year basis, ushering in an exciting yet uncertain phase for stock market enthusiasts. When that will happen, I can’t tell. Only time will tell!(The author is chairman of IIFL Securities)
