Large Caps or Small Caps: Where Should You Be Looking? - The 5 Minute WrapUp by Equitymaster
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Large Caps or Small Caps: Where Should You Be Looking?

Feb 13, 2016

In this issue:
» Sensex and gold: Moving in opposite directions...
» A round up on markets
» ...and more!
Devanshu Sampat, Research analyst

The total market capitalisation of all listed stocks in India has fallen to Rs 86 trillion. This is off 14% from the Rs 100 trillion milestone not long ago.

One can, however, only get a better picture of the damage by digging deeper. A common metric being thrown around nowadays is the percentage decline from the stocks' respective 52-week high levels. I believe this metric only indicates sentiments rather than anything else. It cannot be used as a buying signal. Nor is it an indicator of the risk-reward ratio. It is, in fact, just one of the many proxies to gauge market sentiments.

Nevertheless...since it is popular, let us take look at these data points for stocks from the large cap (as represented by the BSE 200 index) and the small cap (as represented by the BSE Small Cap index) spaces.

The BSE Small Cap is off 21% from its 52-week high in May 2015. About a fifth of the index's stocks have fallen between 0% and 25% from their respective highs. About 60% have declined more than 25% but less than 50%. About 21% of the stocks are down more than 50%. As many as seventeen stocks are down more than 80%!

Coming to the same data points for the BSE 200 index - the index is down 22% from its 52-week high in April 2015. About 39% of the stocks have fallen between 0% and 25%; 46% have fallen by more than 25% but less than 50%; 15% have crashed by more 50%.

Here's a chart that puts things in perspective...

Small caps vs Large caps: Which Have Declined More from Their Highs?

In a nutshell, small caps have been beaten down a lot more. But does that make the small cap space 'the universe of stocks' one should be looking at now? Well...let's discuss this a bit more before we come to a conclusion...

As you would agree, the true metric of attractiveness is valuations. As the earnings cycle of Indian companies has gone for a toss in recent times, gauging the price-to-earnings ratio (for broader analysis) would be futile. One could thus substitute the metric by using the price-to-book value multiple - as it nullifies the impact of the economic cycle.

In August last year, I made a template that indicated the attractiveness of companies using the price-to-book value metric, which I will use today. For this exercise, I have pulled out two separate lists - one with constituents of the BSE 200 index, the other with the constituents of the BSE Small Cap index. I then took their year-end (as of 31 March each year) as well as their latest price-to-book value (PBV) data and put the stocks in various buckets, i.e. PBV of less than one, one to two, two to three, three to six, and more than six.

For example, out of 600 stocks, if 200 were trading in the range of two to three times book value, then the proportion of this bucket would be 33% (only for that year). If 50 stocks were valued above six times PBV, then the proportion of this bucket would be 8.3%, and so on.

If I compare the current data for both the indices going back as much as a decade, the present valuations are still quite far from the attractive periods of early 2009 or mid-2013. But an interesting comparison can be made between the current scenario. The chart below puts things in perspective.

Large caps or Small caps: Where Should One Be Looking?

The chart shows how the valuations scenario pans out at present. There is relatively more value (read proportion of stocks trading below the 2x PBV mark) in the small-cap space; while a good chunk of the large-cap space trades above the 6x mark.

So, in relative terms, the small cap space is an interesting area to be delving in.

Also it goes without saying that in market scenarios such as the present, one should have the stomach to navigate through the volatility. For investors looking to stay away from such volatility, a limited exposure to small cap stocks is suggested.

Are you finding good buying opportunities in the large-cap or small-cap spaces? Let us know your comments or share your views in the Equitymaster Club.

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2:35 Chart of the day

Gold prices soared to their highest levels in a year as investors sought a haven from tumbling stock prices after Federal Reserve Chair Janet Yellen suggested the central bank may delay raising interest rates.

India's benchmark indices - the BSE Sensex and Nifty have slumped by 12.3% and 12.4% respectively in the calendar year so far, witnessing heavy selling pressures from foreign institutional investors (FIIs) who have already pulled out more than US$1.8 billion from Indian equities in 2016.

With a growing number of central banks resorting to negative interest rates to stimulate growth, investors were drawn to gold as an ultimate store of value, fearing that the unprecedented monetary experiments would eventually lead to currency devaluations.

As a result, the price of gold has risen 17% since the start of the year amid all of the continued turmoil in global financial markets, signs of weaker growth, and diminished expectations for rate increases in the USA.

Sensex vs Gold: Moving in Opposite Directions

In a negative interest rate scenario, investors would be paying banks to hold their money. But with stock markets being at their volatile best, Investors are seemingly resorting to protecting their wealth by buying gold.

As per Mr Somasundaram, the Managing Director for World Gold Council (India) stated, 'Stock volatility and growth concerns will boost the appeal of gold as a store of value and consumers in China and India may buy more'.

We at Equitymaster maintain our view of having a small chunk of one's portfolio invested in gold as an insurance against the all the chaos surrounding the world. An exposure of 5% to 10% is suggested.


Global markets nosedived in the week gone by after concerns over global slowdown, falling oil prices and the impact of negative interest rates. The US markets were down by a mere 2% after Janet Yellen allayed fears of negative interest rates being adopted by US Fed as being premature. Even the European markets managed to recover towards the end of the week as a 0.3% growth reported by the Eurozone last quarter helped offset worries arising from Greece slipping back in recession.

However, Japan was the biggest loser registering an 11% slump last week on a surging yen despite Bank of Japan's negative interest rate policy. Other Asian markets also remained weak. Stock markets in China were closed last week due to the Lunar New Year Holiday.

Back home in India, global turmoil and weak corporate earnings pulled down markets by 6.6%. Even a sharp downfall in the earnings of banks, particularly public sector, in the wake of asset quality review by Reserve Bank of India further added to the gloom.

All the sectoral indices ended the week on a negative note. Stocks in the realty, capital goods and metal sectors were the biggest losers.

Performance During the Week Ended 12th February, 2016

4.50 Weekend Investing Mantra

"We are searching for operations that we believe are virtually certain to possess enormous competitive strength ten or twenty years from now. A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Devanshu Sampat (Research Analyst).

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3 Responses to "Large Caps or Small Caps: Where Should You Be Looking?"


Feb 14, 2016

SARAVANAN. Only FII call the shots in markets. DII just react and rarely pro-act. Pre budget FII pulled down the large caps. Now post budget they will square off large cap and pull down the small caps.


paresh Shah

Feb 13, 2016

Nice article. But can you stick to the same bar colors in the two graphs. In one case red is BSE 200 and in the other it is blue. Got me all confused; small things do matter.



Feb 13, 2016

Most of large cap recommendations made by Equitymaster has taken a beating and those holders who did not see when they were high even though did not hit your target, are sitting on paper loses now! I am not sure whether by and hold for 3-5 years holds good for Indian markets! There seems to be no depth in the market and when it slides, it does like a poor construction of high rise building. SInce Jan only 2 bil dollars sold by FII's and this is small, but market went down more. This shows short sellers are having field day than genuine investors

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