Small is Beautiful - Five Themes to Bank on in the Small Cap Space

A close analysis, of the last 18 years, indicates that rarely the Small cap index of BSE outperform the Sensex beyond two years. But Mr. G. Chokkalingam believes that the Small Cap index will outperform the Sensex for a third year in a row in 2022. He discusses here the major reasons.

- Mr. G. Chokkalingam

The small-cap indices outperformed the Sensex by big margins during the calendar years 2020 and 2021. Though both Sensex and BSE Small cap indices are down year-to-date in 2022, still the Small-cap is marginally outperforming the Sensex. Interestingly, when we look back at the history of the last 18 years, rarely the Small cap index of BSE outperform the Sensex beyond two years. Still, we believe that the Small Cap index will outperform the Sensex for a 3rd year in a row in 2022. The major reason for this conviction is a dichotomy between the behavior of FIIs and the domestic retail investors.

FIIs have sold nearly $16 billion worth Indian equities so far in 2022. In contrast, foreign investors have invested just $3.9 billion in 2021 in the domestic equities despite selling $6.8 billion worth of equities in the secondary markets as they have poured in a record $10.7 in the country’s primary market in 2021.

On the other hand, selling of Indian equities by the FIIs may continue for a few more months/quarters as high oil prices and hence, high inflationary scenario, and reversal of monetary policy by the US Fed would be the major concerns for the FIIs in the short-term. Historically, the reversal of monetary policy by the Fed leads to 3% to 5% depreciation of the Indian rupee. Hence, the FIIs may postpone their purchase of Indian equities till a major part of rate hikes/balance sheet reductions by the US Fed is executed. The FIIs may also wait till some resolution to the Ukraine – Russia war emerges. They are likely to invest significantly in the Indian equities only during the second half of CY2022.