The one big investing theme you should focus on in the market today

With no clear bottom in sight, investors are left wondering: Is this just a correction—or the start of something bigger? 

History might have some answers.

The table above captures previous peaks of the BSE Smallcap Index, the extent of its declines, and the time taken for the index to recover to its previous highs.

In the last two decades, the recoveries have taken 3 to 4 years (January 2018 correction) and even 10 years (2008 correction). While this may be unsettling, my long-term view on smallcaps remains positive.

Smallcaps are the cogs and wheels that will help the economy and bigger companies running, and hence will remain not just relevant, but crucial.

Looking beyond the near term, a selective and patient approach to small-cap investing—focusing on business quality and margin of safety—can lead to strong outcomes.

A huge number of the listed companies are smallcaps. Thus, irrespective of the correction, there is always value in some businesses for those who scratch the surface. This universe is growing with more companies coming to the markets through initial public offerings (IPOs).

Smallcap offer a good number of options to choose from in terms of themes and megatrends.

For instance, until a few years ago, small-cap stocks were a prime hunting ground for investors seeking exposure to sectors like travel, tourism, hospitality, and the burgeoning financialisation of savings.

Both BSE and CDSL, the multibagger stocks of this decade, belonged to the smallcap space until a few years ago.

Also read: Why this company is a strong bet on India's capital market growth

Megatrends like EMS and AI have already played out in the small-cap space with companies like PG Electroplast, Dixon, and Netweb leading the charge.

While these themes have gained traction, trending narratives call for caution. The key to a successful investment lies not just in opportunity size but in effective execution.

A blind bet on themes can disappoint. A prime example is the smart meter initiative. Despite a target of 250 million smart meters by 2025, only 18 million meters had been installed as of earlier this month.

Another example is Borosil Renewable - India's first and largest solar glass manufacturer. When the solar theme was being blindly chased, the stock was bid up to 70 times PE (price to earnings) and beyond.

But even when the solar story was going strong, tailwinds could not help this market leader. Its pricing eroded amid imports from China and other emerging economies when anti-dumping duties were removed.

Both the business and the stock price performance disappointed. The profits have shrunk, the debt has gone up, and the return ratios have turned negative.

Also read: IPOs are back on the menu for India's rising elite

In the end, the success of this business boiled down to regulations (counting on anti-dumping duties), and not so much on the solar theme.

That could turn out to be the story for a lot of tips being circulated in the name of thematic investing.

In short, one has to be mindful of risks emerging from disruption, competition, and regulations while betting on the next big thing.

In thematic stocks, growth can be either value-accretive or value-destructive. The latter often involves massive investments but yields poor returns on capital.

Developing an immunity to the fear of missing out (FOMO) is essential for long-term wealth creation. In a market where information asymmetry is narrowing and analytical insights are sometimes misused to justify valuations, patience becomes the cornerstone of sustainable investing.

With that cautionary note out of the way, let’s explore areas of opportunity in the small-cap space.

A compelling pattern has emerged from recent earnings analysis.

Discretionary spending is on the rise, while industries catering to the mass market and bottom-of-the-pyramid consumers are experiencing a slowdown.

This trend underscores the widening income divide and shifting affordability dynamics. While lower-income segments see limited momentum, the aspirations of India’s rising middle class are driving demand beyond basic necessities.

Sectors such as restaurants, hotels, travel, electronics, and alcohol are outperforming traditional FMCG and agriculture.

Within the auto industry, SUVs are gaining market share. The demand for luxury cars, premium watches, high-end brands, and upscale real estate is surging.

A striking example is Apple’s rise in India—its smartphone market share has climbed to 4% in 2024 from just 1% in 2019. In FY24, Apple’s revenue from India surpassed $8 billion, exceeding Hindustan Unilever’s revenue.

The premiumisation theme is unfolding across India’s consumption landscape. This shift could serve as a critical indicator of where wealth creation opportunities lie in the years ahead.

The 'premiumisation' of the economy

In the smallcap universe, there is another way in which premiumisation is unfolding. The companies are moving away from commoditised offerings to niche or premium offerings that come with margin expansion along with less competition.

Some examples include Garware Hitech where margins are expanding because of growth in high margin B2C (business to consumer) products.

Shaily Engineering is moving from the commoditised segment of plastic engineering to niche segments in healthcare.

Mayur Uniquoters is increasing the share of business from exports to original equipment manufacturers (OEMs). This is positive for margins.

Also read: Five fastest growing cement stocks to watch out for in 2025

As mentioned earlier, opportunity size alone is not enough—execution is what truly drives success. These industries and companies are actively capturing that potential.

Among the various themes, premiumisation stands out as one of the most compelling. In the current market correction, these companies are worth keeping on the watchlist.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. 

This article is syndicated from Equitymaster.com