smallcap stocks run up too high? Is this rally in smallcaps going to continue further? Or are we going to witness a brutal crash? If you are an investor, then these questions must be bothering you right now. Let us help clear these doubts. Here’s a quick summary of what’s driving this rally.
AMFI data suggests that inflow in smallcap funds has trumped the inflows in mid and largecaps. A staggering ₹372 bn from funds have found their way to smallcaps, as compared to an outflow of ₹27 bn in largecaps and ₹215 bn inflow in midcaps. We have mentioned dedicated buckets here, and not multicap, thematic, or flexicap schemes here.
While the fundamentals of companies in the smallcap space have shown a recovery, it’s the liquidity and valuation expansion that is driving the gains. This is evident from the rise in Smallcap-to- Sensex ratio. At the start of 2023, the ratio was at 0.46 times, as compared to a long-term median of 0.43 times.
In February 2024, the ratio is way past that average. At 0.63 times, the Smallcap to Sensex ratio has already breached the previous peak of 0.58 in 2018. The earlier corrections from the peak have been in the range of 50% to 70%.
The recovery from the last crash in smallcaps took three years. That pales in comparison to 9 years post-2008 crash. As such, caution and not greed would be the right sentiment to approach smallcaps at present.
While Smallcap-to- Sensex ratio is flashing ‘caution’ sign, insider activity in Indian stock markets is not comforting either. At ₹1.1 trillion, insider selling this year has been almost 2x of insider selling in 2020. And almost six times higher than 2018.
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