Largecaps poised to trump Smallcaps

This chart is a real eye-opener for many investors. It shows the ratio of the Nifty 50 index divided by the small cap index over the last 20 years. This ratio, on a weekly timeframe, ranges between 0.5 and 1. When Nifty performs better than small caps, the ratio goes up. When small caps outperform, the ratio comes down. Over the last two decades, we can see three significant up cycles in this ratio.

Understanding the Cycles

From the 2008 financial crisis, the ratio rose, indicating that while Nifty was falling, small caps were falling even faster. Even though Nifty was down by 65%, small caps were down by 80-90%. In 2011-2012, Nifty again outperformed small caps significantly, with the ratio jumping from 0.55 to 1.1. Post the 2014 elections, small caps started to outperform Nifty again. This continued until 2018 when a small cap crisis saw the ratio rise from 0.55 to 0.9.

The Impact of COVID-19

Since the COVID-19 pandemic, small caps have outperformed Nifty in a significant way. If Nifty has gone up by 100%, small caps have surged by 200%. This has brought the ratio down to very low levels, between 0.45 and 0.5. The big question now is what this means for the future. Could large caps start to outperform small caps again?

Potential Scenarios

There are several possible outcomes based on this ratio. One possibility is that the ratio continues to go down. However, history suggests that these cycles typically last a couple of years. This could mean that for the next few years, large caps, especially Nifty stocks, might outperform small caps.

Possible Market Movements

Several scenarios could lead to an increase in the ratio.

First, if the overall market falls, small caps might fall more sharply than Nifty stocks, causing the ratio to rise.

Second, if small caps remain flat while Nifty stocks rise, the ratio will increase.

Third, even if both small caps and Nifty stocks go up, if Nifty stocks rise faster, the ratio will still go up.

Predicting exact market movements is impossible without a crystal ball. However, based on this ratio chart, it seems that large caps are currently better placed than small caps. This analysis suggests a potential shift in favor of Nifty stocks over the next few years. What do you think will happen? Share your thoughts in the comments below.

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