Widening of risk spreads is a result of significant underperformance of small- and micro-caps to large-caps since the peak of January 2018.
By ET Bureau | Updated:
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t the height of the mid- and small-cap euphoria during January 2018, the ‘risk-reward’ line flattened indicating zero risk spreads for riskier assets which was a highly irrational behaviour, said ICICI Securities.
ICICI Securities said smallcap and micro-cap stocks provide higher ‘margin of safety’ compared to midcap stocks. The brokerage said the risk spreads of small- and micro-caps over large-caps have risen significantly. Widening of risk spreads is a result of significant underperformance of small- and micro-caps to large-caps since the peak of January 2018. “Rational behaviour should ensure that th returns (earnings yi increase as we go the risk curve (lar caps to micro-caps thereby expanding ‘risk spread’,” said I Securities in a client note.
The brokerages risk spreads for microcaps (> 500 rank) over large-caps have risen considerably and become ‘very attractive’ at 7 per cent. At the height of the mid- and small-cap euphoria during January 2018, the ‘risk-reward’ line flattened indicating zero risk spreads for riskier assets which was a highly irrational behaviour, said ICICI Securities.
