Small caps may lose attractiveness amid volatility

An analysis of NSE 500 stocks by Yes Securities Ltd showed that the share of small-caps in average total turnover increased from 8% in January 2021 to 18% in December 2021. In the same period, the share of large-caps declined from 72. % to 57%. According to Hitesh Jain, principal analyst at the domestic brokerage house, seeing their mouth-watering returns in the small-cap segment in 2021, investors were forced to exit large-caps and bet on smaller-sized companies Was. ,

But after this week’s global equity carnage, the tide is turning against small-caps. Data on daily trading volumes provided by Yes Securities showed that at the beginning of January 2022, the share of small-caps in total traded volume reached 21%; However, given the devastation in the broader markets, it fell to 13% on January 25. The Nifty 50 index has fallen 1.4% so far in 2022, compared to a 3.55% decline in the Nifty Smallcap 100 index.

But, is this just a sham or a trend? “Small-caps tend to get battered when market volatility increases, like now. With the fall in trading volumes for small-caps and simultaneous increase in volumes for large-caps, one can infer that there has been some amount of layoffs in the small-cap segment,” said Aishwarya Dadhich, Fund Manager, Ambit Asset Management said. Still, he feels it is too early to draw such a conclusion. “Small-cap earnings growth is a key parameter to focus on. So far, the third quarter earnings for this segment have been mixed,” Dadhich said.

Investors should note that FY23 earnings growth projections for small-caps are aggressive and any earnings disappointment is a risk. Furthermore, small-caps are not immune to general stock market concerns such as the harsh stance of the US Federal Reserve, rising tensions between Russia and Ukraine, slowing global growth and the rise of new Covid variants. In simple words, increased market volatility may prompt investors to seek protection in blue-chip companies, which are generally viewed as safe bets. While considering other risks, the FY23 valuation of small-caps has moderated, further correction cannot be ruled out.