After facing a near two-year bear market, small- and mid-cap stocks are likely to make a strong comeback in 2020 and may even outperform benchmark equity indices Sensex and Nifty, experts told BusinessLine .

Data of past two decades, when small- and mid-cap indices were first introduced by the stock exchanges in late 1990s, suggests that a bear market cycle for these indices typically lasts for 13-21 months.

The current bear market cycle for small- and mid-cap indices on the BSE and NSE had started in January 2018 and lasted for 21 months. During these months, the BSE Mid-cap and BSE Small-cap indices crashed 29.5 per cent and 40 per cent, respectively, from the all time high levels (18,312 and 20,183, respectively) seen in January 2018 to make a bottom in August 2019 (11,950 and 14,975, respectively). Similarly, the Nifty Mid-cap (100) and Nifty Small-cap indices had declined by 31 per cent and 47 per cent, respectively..

It has been nearly four months since both the indices have not gone back to test their low levels, and experts are of their view that they may not hit new lows as the trend has reversed.

“The bear market for small- and mid-cap stocks in India has passed. Irrespective of the ‘gyan’ you hear on economic showdown, data is suggesting a sharp reversal for small- and mid-caps. A 13-21 month bear market for them is over. Commentary and sentiments generally follow the price. When stock prices move, these two aspects too will follow,” said Rohit Srivastava, Founder and Chief Strategist, Indiacharts, a multi-asset technical analysis and research firm.

At a breakout point

According to Vivek Patil, technical analyst, major broader market corrections ended exactly in 13 months. In his December 23 report he highlighted how broader market corrections of 1992-93, 1997-98, 2008-09 and 2015-16 ended almost exactly in 13 months. There are cases when corrections stretched beyond 13 months, to the next Fibonacci level of 21 months, like they did during 1986-88 or 2000-01, he said. The same has been the scenario for correction in small- and mid-cap stocks during 2018-19 as both the indices, which form over 15-30 per cent of market-cap, remained in a downtrend for 23 months according to Patil.

“Mid- and small-cap indices on BSE and NSE are sitting at a breakout point of two-year downtrend, as the fall due to selling pressure in broader markets has largely subsided,” said Srivastava.

Triggers

Loose monitory policy of central banks across the globe including the US Federal Reserve and India’s RBI, which have cut interest rates thrice in 2019, stepped up treasury buying by central bankers and the government’s series of measures to boost the economy are key factors the bears have missed all together, experts said.

The Finance Minister Nirmala Sitharaman has been on a spree to boost demand and support India’s corporate. After 20 years, there is a 10 per cent cut in corporate tax. There are further expectations of a cut in personal income tax rates in the upcoming Budget that will be held in February 2020.

“There have been four big cycles of rally for small- and mid-cap stocks in the last two decades. Two cycles of rally stretched for four years each and other two lasted for 1-2 years each. We recently saw a four-year cycle of rally in small- and mid-cap stocks between 2013 to 2017 and it may not repeat so soon. 2020 could see a shorter cycle. But the impact will be surprising given the force of negative sentiments,” Srivastava said.

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