Small-cap stocks trade at nearly twice Nifty 50 valuation, says VK Vijayakumar

Small-cap stocks are currently trading at nearly twice the valuation of the Nifty 50, according to VK Vijayakumar, Chief Investment Strategist of Geojit Investments. This significant gap in valuations between large-cap, mid-cap, and small-cap stocks has drawn Vijayakumar's attention. In contrast to the typical pattern where large caps have a premium over mid-caps, which in turn have a premium over small caps, Vijayakumar noted that the current market sees large caps trading at a lower valuation compared to smaller caps.

This unusual situation in the Indian market highlights a distinct dichotomy in valuations. Vijayakumar attributed this reversal in valuations partly to investors' current focus on growth stocks rather than value stocks. He cited digital and new-age platform companies as examples, explaining that their elevated valuations are supported by expectations of long-term growth.

Vijayakumar also pointed out that a sustained return of foreign institutional investors (FIIs) could help narrow the valuation gap. In 2020, FIIs sold around USD 19 billion worth of Indian equities, but they turned buyers in July and August of this year, only to become sellers again in September. If the growth momentum in the Indian economy and earnings prospects remain strong, foreign investors may return as buyers, supporting larger valuations for certain segments of large-cap stocks, such as banking majors, financial majors, capital goods majors, and diversified companies.