Sensex has climbed up to 50% from its low and is still down 5.3% in 2020. No sales yet the stock price of Indian company is up by 4,300% amid the penny stock boom. The small cap rally is aided by the influx of amateur traders, with approximately 2.8 million new retail accounts opened since the month of March. Retail investors’ seem to be in a frenzy over small stocks in India. They have reached such extremes that shares of some companies that aren’t booking any sales are going through the roof. Some of them include Transglobe Foods Ltd., a fruit-jam maker that has skyrocketed more than 4,300% this year, and real-estate services firm Shree Precoated Steels Ltd., which has jumped over 1,300%. Both these companies have booked severe losses on no sales in the latest fiscal year.
This would be a risky investment prospect that could be turning sour concerns declaring all kinds of sudden withdrawals by small traders. They might wind up hurting the broader market as well. It is happening because of the rapid expansion in the presence of individual investors in India’s stock market. It will be mirroring record sign-ups that are seen at the U.S. brokerages including Robinhood during virus-related lockdowns.
Sumeet Rohra, a fund manager at Smartsun Capital Pte. in Singapore, “The outperformance of retail-driven small stocks raises the risk of a pullback and some contagion” to broader markets. He further added that investors should stick with “quality stocks which have not participated, rather than chasing small caps.” Stocks of all sizes have roared back from the depths of the pandemic selloff. It is also being said that the recovery in smaller Indian shares has been stronger. The S&P BSE Small Cap Index has surged 69% from its March low and is now up by 9.3% for this year. The benchmark Sensex has climbed about 50% from its low and is still down 5.3% in 2020
Shares of tiny companies have skyrocketed in 2020
The small cap rally has been aided by the influx of amateur traders. It went high to about 2.8 million new retail accounts opened since the month of March, according to data from Central Depository Services (India) Ltd. The flood of people, among which there were many with limited knowledge of fundamental and valuation metrics, is making some pros reconsider their positions.
Chokkalingam G, chief investment officer at Equinomics Research & Advisory Ltd. in Mumbai, “It is time to book some profits, as retail money is chasing penny stocks like crazy.” He also added, “People are buying anything without knowing its price-to-earnings ratio or Ebitda or earnings.” Chokkalingam estimates that the individual investors now account for about half of total trading in Indian equities versus about that of the third last year.
The overall equity market value of India has gone up by nearly $770 billion from the March low, according to the data, as compiled by Bloomberg. It didn’t happen only due to the local individuals – but due to the fact that India is one of the few Asian markets where foreigners are net buyers in 2020.
It is true that some broadening of the rally is welcoming the given concerns not long ago that gains were dominated by just a few big names. However, it is evident that the technicals are supportive, with the Sensex keeping below overbought levels, but some still see a need for caution.