Why I Strongly Believe Small-cap Stocks Will Go Up - The 5 Minute WrapUp by Equitymaster
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Why I Strongly Believe Small-cap Stocks Will Go Up

Jun 10, 2019

Richa Agarwal, Research analyst

I've always believed that when it doubt - step back and have a look at the situation. You get more clarity by rising above the day-to-day and looking at the bigger picture.

In the same vein, have a close look at this chart of the BSE Small Cap Index since 2003...

What stands out the most?

For me, two things are clear:

  1. Over the last 15 years, the index has seen several massive fluctuations.
  2. Despite these occasional large fluctuations - the overall trend of the index has been upwards.
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Beginning from when the small cap index was calculated i.e. April 2003 to now, it has appreciated almost 18 times over these 15 years.

That's a percentage return of 1,690%.

And a compounded annual return of 19.5%.

That's an amazing return by any standards!

This underlying upwards bias of the index stocks has meant that even if you just passively bought the index stocks over this period and just forgot about all the ups and downs that happened in the interim - including the fall this year - you'd still be sitting today on a very lucrative result.

Further, if you'd picked the right fundamentally strong small caps - you'd likely be sitting on an even better result.

So why has the market's overall trend been upwards? Will this continue?

For the uninitiated, the movement in the BSE Small Cap Index is nothing but the movement of the market value of all stocks that make up the index put together.

And it shows in as clear a fashion as possible the growth in the market value of Indian companies over time.

It exemplifies that as the Indian economy grows in size, this combined market capitalization moves up.

Why?

Well, it's pretty simple.

Growth in the economy is nothing but growth in consumption by the people. As Indians consume more goods and services over time - corporate India is going to sell more to them over time.

And as their business volume increases, so will their profits. And with rising profits come higher market valuations.

Thus, as the chart shows, this trend of rapidly increasing market values of Indian companies that has been happening since 2003 will continue in the years to come.

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Yes, there will be ups and downs in the short run... in the near future...

But over the long term, it is headed only up.

Only if Indians as a whole stop aspiring to live better lives, or if India changes dramatically in a way that prevents people from doing so - is the only way in which this process will stop.

And we don't see any reason whatsoever for that to happen.

That's precisely why the Indian markets - and along with that small cap stocks - can go in only one direction over the long term: Up.

And with a strong government with a clear mandate at the Centre, this process is all set to rapidly accelerate.

What's a good place to start?

These highly attractive 3 small cap stocks I believe are ready for a turnaround, and yet are resilient enough to withstand a correction.

If you are willing to wait for a few years for big gains... I believe this is the best time to buy these 3 businesses at a huge discount.

Warm regards,

Richa Agarwal
Richa Agarwal
Editor and Research Analyst, Hidden Treasure

PS: Small cap stocks are back in the news. With Modi's election victory, sentiment has turned positive for this segment of the market. I recommend you listen to our small cap expert Richa Agarwal. She has picked the top 3 small-cap stocks in the market.

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