Over the last few weeks, everyone, including me, has been talking about how the breadth is weak, and 40% of stocks are down more than 40%. Now closer to 50%.
Other pointers – No of Stocks below 200 dema below 20% , RSI for Nifty etc all show oversold readings.
The Smallcap Indices are down 20% from the peak, but the median fall is 35-40%.
A Panic Capitulation Event or a Big Positive Event only confirms a Bottom has been made.
Example – Lockdown date 23rd Mach 20 was a bottom, 90-day pause on Tariffs in Apr 2025, June Elections, Budget 2016, Demon + Trump etc, Corporate Tax Rate Cut 2019.
Nobody knows how a Bottom would be made now – Peak of War and Capitulation or a Reversal in stance.
But can we be looking at
Peak of Trade Tariffs Done, Peak of Geopolitics and War to be over sooner than later.
Unless you are a World War monger or something more Pessimistic.
Smallcaps at 22k Nifty, Microcaps at 18-20k Nifty
- Smallcap Indices back to prices 2 years back.
- Back at Election Day Price.
- In Feb 24 the Nifty was around 21800.
- There is no Index for sub 10k cr Market Cap, but that’s at closer to 2023-2024 zone and say 18-20k Nifty.
- The Risk-Reward is in Favour for focusing on Microcaps with a 1-3 year view.
My stance is that Deep Value Microcaps are the most hated Universe in India, very similar to PSUs and Old economy/Manufacturing companies in 2021-2022. You rarely get a combination of Cheap on Earnings + Below Asset Values + Optionalities.
My suggestion is to go pick Microcap stocks ( 200-10000 cr Mkt Cap – lower the better ), doing your own research or by subscribing our Research Products. I may even say you can subscribe to any other Microcap/Smallcap Research Analysts. But this is a good time for 1-3 year view ( positive surprises can come faster, also who knows).
Even a Random Portfolio in this Universe can do well.
A quote from my 2016 post
“You buy a stock at a price at which you believe you can make money. Markets will decide the temporary loss and eventual profit. So, do your homework well and sit on your fat bum! :)”
Nooresh 2016.
Another fav “No Situation is Permanent. Ye Waqt Guzar Jayega”
Rallies from Bottoms in Smallcaps are Crazy
Right now, all one can see and read is the negatives. When stock prices fall every day and a daily barrage of Bad News, Tweets its difficult to think about a Rally.
Let’s look at how sharp the bounces are when a bottom is made. BSE Smallcap Index taken as thats the best Universe. BSE has stopped updating the ticks but price available on EOD basis on website. As of today its at 45165, where it was back in Jan 2024.
- Trade Tariff Bottom of April 2025
- Post the 90-day pause, there was a big gap up.
- Then China paused another gap up.
- Currently Smallcap Index is back to that price.
- It was a 36% rally from the lows. At peak it was just 3% from all time high.
2) Indian Elections June
- Smallcap Index is now at the closing price of 04th June 2024.
- It rallied 30-33% from Election day lows to hit new highs.
- From the March 2024 lows it was up 44%.
3) Rally from Oct 2023.
- Hamas attacked Israel on 7th Oct 2023.
- Fund Managers called Smallcaps Frothy. Lump sum caps, etc. The Smallcap Index is 10-20% higher than in September 2023.
- US 10 year at 5% . Crude at 90. FIIs sold a lot.
- A rally of 32% and new all time highs.
4) Rally from March 2023 bottoms.
- Regional Banks in US. SVB etc.
- Adani Hidenburg in Jan 2023.
- Tax Loss selling and FIIs.
- A sudden bottom on last day of Financial year.
- a Rally of 48% by Sept 2023.
- A single day dip 3-4% on Smallcap Index with SEBI chief calling for Stress Tests on Smallcap Funds. Fund Managers calling Frothy Smallcaps.
- The Rally continued till 2024 with a peak at 57700. Up 120% from lows of March 2023.
5) Rallies during Russia Ukraine War 2022.
- Bounce of 18% post start of war.
- A rally of 29% from June 22 lows.
- Almost back to all time highs.
- A higher bottom in March 2023.
6) 2019 Corporate Tax Cut Rally and 2020 mad recovery
- LTCG in 2018 started the downfall. Guess what Nifty was flat on that day.
- Followed by IL&FS credit crunch, DHFL, SEBI classification of stocks and more global.
- Pain continued in 2019.
- A bottom followed by Corporate Tax Rate Cut trigger.
- A rally of 24% from lows of Aug 2019. 15% from Corporate Tax Cut.
- Covid comes out of nowhere and 40% crack.
- It recovers 80% from the lows and back above pre covid highs by Sept 2020 !!. Could you even imagine.
7) Budget Bottom 2016 and Demon/Trump bottom in 2017.
- Markets peaked in mid of 2015 and drifted till Feb 2016. Bottomed on Budget Day.
- Rally of 42%
- Demon/Trump gap down in 2016.
- Rally of 36% by May 2017.
- Continued further in 2017.
8) Taper Tantrum and USD INR mad bottom of 2013.
- 2010-2013 was the toughest phase. Nifty was down only 15% in 2013, but Smallcaps broke 2011 lows and was down 50-55% from 2010 highs.
- 5-8 year return zero for most Indices.
- QE Taper Tantrum.
- USD INR went from 44-48 to 68 in 2 years. 30% in 6 months. 12 years depreciation and still not as bad.
- What happened in 5 months then has happned in 5 years.
- August bottom to Jan was 31% rally.
- By July 14 it was more than 100%.
- 4x by Jan 2018.
A rally of 20-30% in 3-6 months is so common in most bottoms of the last 10-15 years.
Many stocks would have much sharper recoveries. At times if its a multi-year bottom the next 1-3 years is a multi-fold move.
Hope now you understand why most Long Term Smallcap/Microcap Investors do not take Extreme Cash Calls.
Imagine being on high cash in one of such Cycles. Tough to get back in.
But if one can deploy fresh capital in such times, imagine the head start. ( This is what happened to Covid Investors)
Conclusion
- The Median Fall is 35-40%. Smallcap Index is down 20%. 2 years + flat.
- The Indian Micro situation is not as bad like it was in 2019/2013.
- The World has not gone as bonkers as in 2007, so 2008 type fall looks difficult. Not expecting Covid type pandemic again, given it’s a once-in-100-year event.
- A bottom can happen via a Capitulation and a Big Black Event or a Recovery out of nowhere with some Positive Event. Nobody knows beyond a Point.
- But do remember the Rallies in Microcaps/Smallcaps are very Sharp when it does.
- Today it does not look a possibility but if you are Long Term Bullish on Indian Microcaps/Smallcaps this might be the time to allocate more.
- All this does not matter if your view is World War 3 or a bigger Black Swan beyond Covid. Even then, will Markets never come back? History doesn’t say so.
My Personal View
- In Bear Markets, investors start doubting the best of businesses and curse the Stocks because they have corrected. A lot of Investors who came in Late dump their holdings to not Return back as they are only looking at Stock Prices.
- A 15-25% Cagr in Smallcaps/Microcaps or even Large Caps is not a Linear Scale. There are times when one loses 20-40% from peak and back to where one was 2-3 years back. There are years where you go up 50-100% in a Year.
- Your behavior in those 2-3 years is going to decide the Outperformance. Increasing Equity Allocations in such periods is the big game changer.
- This is the time where solid businesses are available at prices where one can hold for years without any worry given the Valuations and Future Potential.
- In every Bear Cycle a section of Market becomes totally disregarded and cheap with a possibility to make Multi-Fold Returns.
- In todays market the similar spot is Deep Value Microcaps.
- Microcaps implying sub 10k cr market and majority of them in 200-5000 cr Market Cap.
- These are places of interest for us.
- Most of our recommended stocks are in these segments and have been badly hit. We have seen such phases in 2022-2023,2019,2016,2013. Adding to your equity allocation towards Smallcaps in such phase rewards well over the next 2 years.
- There are many companies with a long history of being listed but now forgotten. There are newly listed companies where Short term Punters have dumped. Many different such opportunities.
- Focus on Strong Balance Sheets, Businesses instead of Narratives. Very rarely one gets a combination of Deep Value ( reduces Capital Loss Risk) + Earnings + Optionality ( Increases chance of Multi-Fold Returns).
- Some Companies can go from Deep Value to High Growth also. Difficult to imagine today.
- At the same time a lot of High Growth companies with Crazy Multiples ( 10-15x Sales. 40-100 PE ) may go through a multi-year sideways correction. Most of these are in Larger Midcaps.
- As a matter of fact one may be better of buying the Deep Value Microcaps compared to Large Caps. The Large Midcap Basket between 101s to 500th Stocks is still Expensive thanks to Domestic Mutual Fund being forced to invest in SEBI classification, which says anything below 34000 cr market cap is Smallcaps.
- One may even consider how much one should shift from LargeCap,Large Midcaps to the Deep Value Microcaps.
- Hold and increase allocations to Microcaps and Smallcaps recommended
