Small Stocks Slump As Market Seesaws In 2022; 'Good Year' Ahead

Small stocks of Dalal Street grappled with turbulent times in 2022 as high volatility and higher interest rate regime sapped investors' appetite for these scrips but the horizon ahead seems less cloudy for the New Year.

While the 30-share Sensex scaled multiple record peaks with bluechips glittering, small stocks underperformed and the BSE small-cap index declined more than 3% this year.

In comparison, the BSE Sensex climbed 2,673.61 points or 4.58% till December 27.

Market experts said small and mid-cap companies underperformed this year due to various factors but are hopeful that the broader market will rebound in 2023.

Braving headwinds of high inflation, the Russia-Ukraine war and higher interest rates, the Indian equity market managed to not only hold its ground but also emerge as one of the best performing equity markets.

Weak earnings are the main factor, with the exception of the banking industry. Rising interest rates were a worry as well because small companies typically have a greater cost of capital than large companies. In general, foreign investors choose large caps, and they have been net buyers over the past two months.

"SIP flows are still at record highs, with the majority going to bluechip funds, which help large-caps outperform the overall market," Santosh Meena, Head of Research at brokerage firm Swastika Investmart Ltd, said.

According to analysts, the small-cap index is always far more volatile than the mid and large cap indices.

The mid-cap index tracks companies with a market value that is, on an average, one-fifth of bluechips, while small-cap firms are almost a tenth of that universe.

Till December 27 this year, BSE small-cap gauge declined 940.72 points or 3.19% . The smallcap index reached its all-time high of 31,304.44 points on January 18 and later hit a 52-week low of 23,261.39 points on June 20.

On the other hand, the mid-cap index gained 215.08 points or 0.86% till December 27. It touched a 52-week low of 20,814.22 points on June 20 and one-year peak of 26,440.81 points on December 14.

The BSE Sensex climbed 2,673.61 points or 4.58% till December 27. The benchmark index reached its all-time high of 63,583.07 points on December 1 after hitting its 52-week low of 50,921.22 points on June 17.

2022 was not a good year for mid and small-cap stocks. Due to the smart rally in mid and small-cap stocks in 2020 and 2021, they were subject to hefty profit-booking. Some investors chose to lock in their profits in 2022 because they had purchased at a lower price in 2020 and 2021.

"Consequently, mid and small-caps underperformed large caps," Sunil Damania, Chief Investment Officer at equity advisor MarketsMojo, said.

According to analysts, smaller stocks are generally bought by local investors while overseas investors focus on bluechips or large firms.

"In some cases, zero is preferable to negative, and Indian investors will be overjoyed to close 2022 with a flat to positive return despite the upheaval that characterised the majority of global markets," Parth Nyati, Founder of online stock trading app Tradingo, said.

Meena said the initial part of 2023 may remain volatile amid global uncertainty, but things are likely to improve for the broader market as the year progresses.

Echoing similar views, Damania said while 2022 was not the year for small and midcap stocks, 2023 is likely to be their year.

"If we look at the track record of the last 15 years, the broader market didn't give a negative return for two consecutive years, barring 2019. So we can expect that 2023 could be a good year for small and midcap indices".

"It seems the inflation monster is behind us, and we may see interest rates peak soon, which will make mid and small-cap stocks more attractive. The Indian growth story is looking promising, which is another favourable factor for the broader market,: Nyati said.

In 2021, the midcap index gained 7,028.65 points or 39.17% while the smallcap index zoomed 11,359.65 points or 62.76% . In comparison, the Sensex jumped 10,502.49 points or 21.99% last year.

Sensex had gained 15.7% in 2020, where the benchmark index witnessed both heavy selling and massive buying. Small and midcap indices had emerged as markets' favourites in 2020. Small and mid-cap stocks had gained up to 24.30% in 2020.

"It was a tough year for the broader market. They tend to underperform in an uncertain environment as investors move to safe havens. They have a higher cost of capital, so their profitability comes down in a rising interest rate environment. They took a hit on their margin due to higher inflation because they have less power to pass costs on to consumers," Nyati said.

Shrikant Chouhan, Head of Equity Research (Retail) at Kotak Securities Ltd, said equity markets have faced four consecutive shocks in the last two years in the form of COVID, high inflation (disruption in global supply chains), geopolitics (Russia-Ukraine war) and sharp rise in interest rates.

Chouhan noted that the Indian economy has been able to withstand these shocks relatively better than other economies.

Deepak Jasani, Head of Retail Research at HDFC Securities, said Indian markets in 2022 benefitted out of better management of macros, including inflation management and corporate earnings, that did not disappoint majorly despite challenging times.

Since Indian macros were in a much better position than most of their international counterparts, 2022 was all about sectors that were related to the domestic economy.

"The banking industry held the leadership position, followed by capital goods. The sectors tied to the world economy, particularly IT, suffered the most losses this year," Meena said.