The Hang Seng index and the Nifty in US dollar terms have long been observed for their correlation. Over the past 30 years, these markets displayed striking similarities in performance. From the early nineties until the COVID-19 bottom, their movements were almost identical, with peaks and troughs mirroring each other.
However, a significant shift occurred post the COVID-19 bottom in 2020. While Nifty surged, doubling and even tripling from its lows, the Hang Seng index plummeted by nearly 40%. This sudden and extreme divergence between the two markets raised questions about the underlying factors driving this disparity.
The divergence between these markets defied conventional expectations. Despite China and Hong Kong being perceived as less affected by COVID-19, their markets suffered substantial losses compared to the resilient performance of the Indian market. This unexpected outcome underscores the unpredictability of market movements, challenging common narratives and analyses.
Price as a Guide
In hindsight, predicting such outcomes would have been nearly impossible. However, those who followed the price and remained attuned to market movements were better positioned to adapt. Rather than relying on forecasts or narratives, aligning investment decisions with the evolving price dynamics proved to be more effective.
Spotlight – Can Small Caps continue to outperform Large Caps ?
This ratio chart illustrates the performance of Small Caps relative to Large Caps over a 20-year period, ranging between 0.4 and 0.95. A rising trend line indicates Small Caps outperforming Large Caps, while a declining trend line suggests the opposite.
During market uptrends, Small Caps typically excel as the numerator experiences more substantial growth than the denominator, driving the ratio upwards.
Conversely, in bearish market conditions, Small Caps endure sharper declines compared to Large Caps, causing the numerator to contract more rapidly, leading to a downward trend in the ratio.
Notable examples include the 2008 Global Financial Crisis and the 2018 small cap crash.
Presently, the market appears to be maintaining an upward trajectory, potentially signalling further potential on the upside before a healthy correction ensues.
While we may not exactly know how much steam might be left for small caps in the current rally, one can surely consider more allocations towards large caps as the ratio expands towards previous tops around 0.8 & 0.9.
From a generic point of view, it is advisable to maintain diversified allocations across all market cap segments rather than attempting to time entry and exit points within a single segment.
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