Smaller stocks trail in rebound

Shares of small- and medium-sized companies have failed to keep pace with their larger peers in last month's rally. Not only last month; these stocks (as represented by BSE's small-cap and mid-cap indices) have lagged benchmark indices this calendar year. Since the start of the year, the BSE Sensex has gained nearly three per cent, while the BSE Midcap index is up only two per cent and the BSE Smallcap has dropped six per cent. This is in sharp contrast to past two years, when mid- and small-cap stocks outperformed frontline indices by a good margin.

Analysts say shares of mid- and small-cap companies lost flavour following the sharp correction in the market in January and February due to concerns over global growth. These counters could come back in vogue if the current rally continues and if the early signs of recovery in the economy sustain.

"Bear market conditions are bad for mid- and small-caps. If the bull market conditions prevail, it will be good for these stocks," said Tirthankar Patnaik, India Strategist at Mizuho Bank.

Typically, shares of small companies are high-beta in nature, which means they fall more than the broader indices during downturns and gain more during upturns.

Considering, Indian equities are expected to do well over the next one year , smaller companies could yield better returns, say analysts. "From the point of view of next two to three quarters, investing in small- and mid-caps could be a good bet because of their high-beta nature," said Patnaik.

Experts believe smaller companies could be a good play and attract more fund allocation as the economy revives, as most of them have domestic focus. Given that the economic outlook has improved, these counters should start doing better in a couple of quarters' time.

The outlook towards equities has improved after fourth quarter gross domestic product growth came in at a strong 7.9 per cent. Also, better-than-expected fourth quarter earnings and prospects of a good monsoon have provided much-needed boost to stocks.

As in the past, the rally could be led by large-caps and later percolate to smaller stocks. "Whenever there is a rally, overseas investors use the top-down investment approach. As we are in that cycle, the big market leaders will gain first and later investors will scout scramble for mid-small cap stocks," said another market expert.

However, while investing in smaller stocks, experts say a bottom-up approach could be useful. A bottom-up investing involves taking a company-specific approach rather than the economy or a sector.