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DSP
Sep 12, 2024 4 mins
The Indian stock market cycles show small- and mid-cap (SMID) stocks often outperform large caps during bull markets, but they also face steeper losses in downturns. With SMID stocks currently holding a large alpha over large caps, investors may benefit from shifting focus to the relative stability of large caps.
The Indian stock market moves in cycles. During each upcycle, relatively small firms from the small- and mid-cap (SMID) space exhibit stellar performance. As can be seen in the chart below, SMID stocks have significantly outperformed large caps (LCs) in every upcycle bull market so far.
Source: Bloomberg, BSE, DSP. Data as of Aug 2024.
What the above chart also reveals is that during each downcycle, SMID stocks lose almost all the alpha (i.e. outperformance) generated during the previous upcycle. This is consistent with the typical volatility that SMID stocks exhibit: their relatively higher volatility results in larger drawdowns during bear markets compared to the relatively shallow declines seen among large caps.
What does this mean for investors? Capturing the extra alpha that SMID stocks can deliver requires investors to focus on the margin of safety (i.e. the gap between a stock’s market price and its intrinsic value) rather than relying on recent outperformance.
In fact, it makes a lot of sense to have an aggressive attitude towards SMID stocks when their alpha over large caps is low. Currently, SMID stocks have a large alpha over large caps, so investors might be better served by focusing more on large caps.
For more actionable insights backed by data and analyses, we invite you to read the latest edition of Netra in its entirety.
This blog is for information purposes only. The recipient of this material should consult an investment /tax advisor before making an investment decision. In this material DSP Asset Managers Pvt. Ltd. (the AMC) has used information that is publicly available, including information developed in-house and is believed to be from reliable sources. The AMC nor any person connected does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Data provided is as of July 2024 (unless otherwise specified) and are subject to change without notice. Past performance may or may not be sustained in the future and should not be used as a basis for comparison with other investments. These figures pertain to performance of the index and do not in any manner indicate the returns/performance of this scheme.
The statements contained herein may include statements of future expectations and other forward-looking statements that are based on prevailing market conditions / various other factors and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements.
All content on this blog is the intellectual property of DSPAMC. The User of this Site may download materials, data etc. displayed on the Site for non-commercial or personal use only. Usage of or reference to the content of this page requires proper credit and citation, including linking back to the original post. Unauthorized copying or reproducing content without attribution may result in legal action.. The User undertakes to comply and be bound by all applicable laws and statutory requirements in India.
For Index disclaimers click here. Large-caps are defined as top 100 stocks on market capitalization, mid-caps as 101-250, small-caps as 251 and above.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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