IANS
After two impressive years of growth, India’s smallcap stocks are now experiencing a significant correction. Investors are left wondering if the recent India-US trade deal represents a turning point for this segment.
The Smallcap Market’s Recent Journey
– Post-Pandemic Performance: Smallcap stocks thrived during the pandemic recovery, with the smallcap index delivering returns of 47.5% in 2023 and 29.3% in 2024. This surge was fueled by strong domestic liquidity, heightened retail participation, and an optimistic outlook on India’s long-term growth.
– 2025 Downturn: This upward trajectory has sharply reversed in 2025, with the smallcap index plummeting nearly 10%, marking the worst performance for this segment since 2018. In January alone, more than half of smallcap stocks faced corrections exceeding 20%. Currently, many stocks are still trading 25% to 50% below their peak values.
How the India-US Trade Deal Affects Smallcap Stocks
Sentiment around smallcap stocks shifted dramatically when India and the US reached a trade agreement. Key details include:
– Tariff Reductions: The deal lowered reciprocal tariffs on Indian exports from 25% to 18% and entirely eliminated an additional punitive levy connected to Indo-Russian oil trade.
– Market Reaction: Following this announcement, broader indices such as the Nifty Midcap 100 and Smallcap 100 surged nearly 3% in a single session, particularly benefiting export-oriented sectors as expectations of enhanced earnings visibility and improved competitiveness in the US market took hold.
Relative Advantages for Indian Exporters
India’s new tariff rate now stands more favorable compared to several competing Asian nations, with countries like Bangladesh, Sri Lanka, Taiwan, and Vietnam facing tariffs around 20%, and Indonesia, Malaysia, Thailand, and the Philippines close to 19%. This competitive edge is particularly promising for Indian exporters.
Veteran investor Ashish Kacholia suggested that this trade deal could signal the end of the smallcap bear market, describing it as a pivotal moment in the wake of prolonged selling pressure.
Caution Amidst Optimism
Despite the relief rally, not all analysts are convinced that this trade deal will ignite a comprehensive resurgence in smallcap stocks.
– Ravi Singh, Chief Research Officer at Master Capital Services, emphasizes a cautious approach, viewing the trade deal as a supportive tailwind rather than an automatic catalyst for a widespread rally. He notes that smallcap firms often operate with narrow product lines or concentrated business models, meaning the benefits will predominantly favor those with exposure to export-linked sectors.
– Additionally, the current market environment is fundamentally different from the liquidity-driven rallies of the past, where earnings quality, cash flows, and balance sheet strength are once again on investors’ radar.
Opportunities in Export-Heavy Smallcaps
The trade deal could significantly benefit export-focused smallcap companies, particularly in sectors like:
– Pharmaceuticals
– Textiles
– IT services
– Engineering goods
– Auto ancillaries
Lower tariffs will enhance price competitiveness in the US market, which can lead to improved profitability for small firms operating on thin margins.
Kush Gupta from SKG Investment & Advisory believes that the deal notably enhances the risk-reward equation for export-oriented smallcaps. He also highlights a shift in sentiment, with smallcap indices experiencing their best single-day gains in months.
Challenges and Valuation Considerations
However, challenges persist. Valuations in parts of the smallcap segment remain high, trading at nearly 30 times forward earnings against an expected earnings growth of only around 11%. Many smallcap companies have also fallen short of earnings expectations in recent quarters.
Gupta warns that while the trade deal may uplift sentiment, it won’t resolve underlying valuation issues immediately. It’s a boost for specific sectors but not a blanket solution for all smallcap entities.
Valuations: A Silver Lining?
A notable outcome from recent corrections is the cooling of valuations among quality smallcap stocks. Analysts estimate that over a third of the smallcap universe—approximately Rs 16 lakh crore in market capital—now trades at fair or even undervalued levels.
Arjun Guha Thakurta of Anand Rathi Wealth points out that the disconnect between stock prices and business performance may yield potential opportunities. Many smallcap stocks, despite facing significant sell-offs, have maintained decent earnings growth. Selling pressure was largely sentiment-driven, exacerbated by foreign outflows and risk aversion rather than fundamentals deteriorating.
Strategic Investing in Smallcaps
Most analysts recommend avoiding blind index-level investments in smallcaps at this juncture. Instead, investors are encouraged to adopt a selective, bottom-up approach. A phased allocation strategy is advisable:
– Gradually increase exposure to smallcaps.
– Focus on companies with robust balance sheets, sustainable cash flows, and clear earnings visibility.
Risk management remains vital, as smallcap investing carries inherent volatility. While the trade deal mitigates some external uncertainties, it does not eliminate company-specific risks or broader market volatility. Analysts suggest aligning smallcap investments with individual risk tolerance and timeframes.
Arunagiri from TrustLine Holdings believes that the recovery of small and midcaps will unfold over time rather than in a straightforward manner. He asserts that the current phase offers opportunities for stock-specific alpha, yet warns against expecting a swift return to past speculative frenzies.
In conclusion, while the India-US trade deal has the potential to uplift certain segments of smallcap stocks, a cautious and strategic approach is essential for investors ready to navigate this evolving landscape.