Mar 22, 2024 Equities

India’s time to shine?

The recent gyrations of Indian small caps should not detract from the country’s equities longer term appeal.

Classical Sanskrit, the ancient language of the India subcontinent, is rightly famous for its subtle scope, multiple interpretations and puns. This allows for such literary master pieces as Rāghavapāṇḍavīya, an epic poem which simultaneously recounts either a god’s search for an abducted goddess or warlike adventures such rustling cattle behind enemy lines, depending on how each verse is interpreted.[1] Lately, investors have similarly been wondering whether they have had the correct read on Indian equities.

Our Chart of the Week goes a long way towards answering that question. It shows the relative performance of small caps compared to blue chips[2] in different regions. As China’s popularity has sunk since 2021, India became an investor favorite. Almost uniquely, Indian small caps stood out by their strong performance compared to larger peers in their home market, until very recently. To put that in perspective, a bit of background is helpful on both the country and small caps in general.[3]

Recent market performance of Indian small caps relative to large caps compared to other regions

*small cap index/large cap index
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 3/15/24

Start with the prospects for India’s economy and markets as a whole. With per capita income still only at one-fifth of China's, India has plenty of catch-up potential, somewhat independently of global economic conditions. “Growing skepticism in the West about relying solely on China for some products is boosting India’s appeal as a destination for foreign direct investment,” argues Elke Speidel-Walz, Chief Economist Emerging Markets at DWS. India’s world beating technology companies are already well-integrated technology services providers to many leading multinationals. Such businesses also look well positioned to benefit from artificial intelligence (AI) as another secular trend.[4]

It is exactly during phases of market excitement, though, that medium- to long-term-oriented investors should be asking themselves some hard questions. As in other markets, small caps – and investment vehicles targeting them – can be risky not only because of lower liquidity in the underlying stocks, but also due to less regulatory or investor scrutiny and corporate governance concerns. Recent weakness in small- and midcap stocks appears to have been triggered by India’s securities regulator fretting about speculative froth and commission arrangements among India’s fast growing small- and midcap mutual funds.[5]

As always, there are different ways of looking at this. Against a more benign market backdrop, the same regulatory moves might have been seen as another sign of corporate governance improving in India’s close-knit world of mostly family run businesses.[6] Similarly, especially for a country as diverse as India, fruitful political competition is essential to provide the necessary checks and balances for a functioning democracy. We expect Narendra Modi to win another term in parliamentary elections held from April through May but think that India’s longer-term appeal should remain intact over a wide range of politically plausible outcomes.

From a longer-term perspective, recent ramping up of government capital expenditure should help India make better use of its big demographic advantages, notably having both a young workforce and falling birth rates.

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1. Ostler, N. (2005) “Empires of the Word: A Language History of the World”, p. 184-185

2. In the present context, we use big caps, large caps and blue chips as synonyms for the companies with above average market capitalization and high weightings in capitalization weighted indices, making the later good proxies for a country’s blue chips.

3. For more details on small cap investing in general, see link

4. For more details on India’s prospects, see India – a poorly kept secret (

5. Exclusive: India regulator moves to curb inflows into small- and mid-cap funds - sources | Reuters, as of Feb 29, 2024

6. How an ugly marital feud could change Indian business (, as of Dec 20, 2023

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