Shares of smaller companies continued to outperform larger peers, propelling the BSE smallcap index to gain for the ninth consecutive session on Wednesday, marking its longest winning streak in nearly six months.
The index rose 0.7% on Wednesday to close at a seven-week high of 56,617.46 points. The smallcap index jumped 8.6% in the previous nine sessions, compared with 6.5% gains for the midcap index. The benchmark indices have risen nearly 5% in the same period.
On Wednesday, the benchmark indices failed to hold on to most of their intraday gains. The Sensex rose 0.1% to 80,956.33 points and Nifty was flat at 24,467.45 points.
The broader market has outperformed despite questions about their valuations being higher than historic averages as well as compared to the Nifty 50. While specific stocks and sectors have been hit hard during corrections in the last two months, the rest of the market has been outperforming, analysts observed.
Kotak Institutional Equities has pointed out that corrections have been in two broad sets of stocks – consumption-related sectors with earnings downgrades and ‘narrative’ sectors where valuations have gone from extremely frothy to merely frothy.
However, some believe the outperformance is likely due to the lack of options for investors among largecap stocks where most sectors face single-digit growth this year.
G Chokkalingam, founder of Equinomics Research, identifies three key reasons for the outperformance – FPI selling in largecaps, surge in new retail investors and fundamental growth stories in the broader market.
“Although FPI selling has tapered off in the last few days, there are still apprehensions that it may continue,” Chokkalingam said. Since FPI portfolio is more concentrated towards largecaps, these stocks tend to underperform when FPIs sell, he said.
Chokkalingam said the universe of smallcap stocks is multifold compared to that of largecaps, and that many of these companies have distinct businesses. “The unique products and services offer growth story, value-unlocking story, and possible acquisition stories,” he said.
Market participants expect the outperformance to likely continue in the near term unless there is a clear reversal of trend in foreign fund flows.