The small cap index has been on an impressive run, currently standing at 14,000 levels. Just four years ago, it had dropped to 3000 levels, marking a significant turnaround in its fortunes. This remarkable growth from 3000 to 10,000 and then to 14,000 is a testament to the resilience and potential of small cap stocks.
At each stage of this rally, there were doubts whether the market could sustain the upward momentum. However, time and again, the market proved skeptics wrong by defying expectations of a downturn. The primary driving force behind this surge is the influx of liquidity in the economy, both domestic and sometimes even overseas.
Investors are seeking opportunities to counter the impact of inflation and are actively looking for investments that can provide substantial returns. This search for viable options has created a shortage of good quality stocks in the market, leading to money flowing into small cap stocks to optimize returns.
Zafar from Invesys Capital has performed an insightful analysis of the small cap market over the past 20 years. This study highlights that major bull runs in small caps have lasted around two years on average. During these runs, the gains have ranged from 129% to a staggering 740%. The current rally has seen a gain of 73% over nine months, indicating that there is still potential for further growth.
The historical data suggests that previous rallies have consistently exceeded the nine-month mark. Therefore, there is a probability that the current period may extend to one year, one and a half years, or even two years. Looking ahead, 2024 could potentially be another fruitful year for small cap stocks.
Despite the prevailing narrative dismissing small caps as overvalued and expecting large caps to take charge, it is essential to consider the historical perspective. The repetition of similar patterns over the past 20 years indicates that small cap stocks may continue to outperform for some time. Both the duration and extent of potential gains cannot be underestimated.
While history may not repeat itself exactly, these recurrent movements suggest that there is scope for the small cap index to make further substantial strides. Therefore, it is advisable to maintain allocations to small cap stocks and not succumb to fears of an imminent drop-off.
Investors should focus on riding their winning positions and stay open to the idea that small caps could witness even more significant growth in the future. The strategy should revolve around capitalizing on the potential of small cap stocks rather than prematurely exiting due to uncertainties.
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