Small-cap Index Posts 13% Gain in April, Outpacing Nifty 50 Amid Macro Uncertainty

Market Sentiment Improves Amid Crude Oil Price Drop, Small-Cap Stocks Surge

The Indian stock market's small-cap segment has been witnessing strong momentum lately, driven by improving market sentiment amid a decline in crude oil prices and signs of easing tensions in West Asia. The Nifty Smallcap 250 index has gained over 13% in April, outperforming the benchmark Nifty 50, which has risen by 8% during the same period.

This surge in small-cap stocks has been led by companies such as Ola Electric and Gallantt Ispat, which have risen by up to 70% this month. In fact, more than 230 stocks in the Nifty 250 index are in the green for April, with as many as 175 stocks rising by more than 10%. On Friday, April 17, the Nifty Smallcap 250 index rose by more than 1%, while the Nifty 50 rose by half a percent.

Experts, however, are cautious about the persisting geopolitical uncertainties and believe that large-caps are better bets at this point. They point out that the fear of Foreign Institutional Investors (FIIs) turning sellers on rallies is weighing on large caps. Therefore, the broader market may do better in the near-term, supported by fund flows and retail buying in the segment.

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Experts highlight that the recent rally in most small-cap stocks has stretched near-term valuations, with valuations of small-caps near historical averages or a little higher. This leaves a limited margin for error, and any disappointment in earnings or execution can lead to sharp corrections.

Macro risks such as higher oil prices could act as a headwind, but oil prices have already corrected meaningfully from their peak by nearly 25%, offering some relief. Experts advise avoiding chasing momentum and focusing on companies with strong balance sheets, expected earnings growth over the next two to three years, and competent management with a proven track record.

Historically, phases like this have created the best entry points. Between FY19 and FY24, small-cap PMS delivered nearly 23% average returns, outperforming large-caps by about 91%. 73 small-cap companies delivered over 5 times returns in the five years leading up to April 2024, compared to just 10 mid-caps and none in large-caps.

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Experts recommend accumulating corrections, not exiting, but with discipline. This is not a broad-based buying opportunity. Capital should be directed toward sectors with clear earnings visibility, such as banking, infrastructure, metals, defence, water management, and healthcare.