According to a recent analysis by Edelweiss Asset Management's Niranjan Avasthi, mid-cap and small-cap stocks have consistently outperformed large-caps during strong market cycles over the past 20 years. As reported by Mint, Avasthi noted that while large-caps generally hold up better during weak markets, mid- and small-caps have delivered significantly stronger returns whenever the broader market has rallied. The data reveals that 2009, 2014, 2017, 2021, 2023 and 2024 all saw wide gaps in favour of mid- and small-caps, underscoring their ability to outperform during strong market cycles. This trend is now being reflected in global markets, with small-cap value stocks emerging as the best performers both year to date and over the past 12 months, beating major indexes including the S&P 500, Nasdaq Composite, and Russell 2000.
The historical data shows remarkable performance gaps during strong market periods. In 2009, Nifty 100 gained 84.9% while Nifty Midcap 150 surged 113.9% and Nifty Smallcap 250 climbed 117.4%. Similarly, 2017 saw Nifty 100 rise 34.2% compared with Nifty Midcap 150 and Nifty Smallcap 250 gains of 56.6% and 60.2% respectively. According to the analysis, 2024 delivered 13% returns for Nifty 100 versus 24.5% for Nifty Midcap 150 and 27.2% for Nifty Smallcap 250. These figures highlight the consistent outperformance pattern of mid- and small-cap segments during favorable market conditions. The current trend continues with the Russell 2000 Value index up 21% year to date and 35% over the past year, demonstrating the sustained strength of small-cap value investments.
Large-caps have historically demonstrated better downside protection during challenging market periods. As reported by Mint, during the 2008 global financial crisis, Nifty 100 fell 53.1% compared with 64.9% for Nifty Midcap 150 and 68.6% for Nifty Smallcap 250. Similarly, in 2011, Nifty 100 declined 24.5% while Nifty Midcap 150 and Nifty Smallcap 250 lost 30.2% and 34.3% respectively. According to Avasthi, this pattern shows that large-caps win primarily during bad years where they simply fall less than their smaller counterparts. The current market environment reflects this pattern, with small-cap value stocks resurgent after being beaten-down, as many investors rotate from overvalued large-cap stocks into these formerly undervalued segments.
Based on the historical performance data, Avasthi recommends that investors should decide their allocation to large-, mid- and small-caps based on their conviction in India's long-term growth story rather than just volatility considerations. As reported by Mint, he explained that "If you are bullish, you have to have mid & smallcaps; that's where the wealth is created. If you are bearish, stick with largecaps; that's where you protect downside." However, he warns that being optimistic about India's economic growth and avoiding mid- and small-caps could limit long-term gains, emphasizing that the choice should be about medium-term views on India's economic outlook rather than market capitalization preferences. The current global trend supports this approach, with small-cap value ETFs like the Vanguard Small-Cap Value ETF and State Street SPDR S&P 600 Small Cap Value ETF emerging as attractive options for diversified portfolios seeking value opportunities in the current market environment.
