Small-, mid-cap stocks could outperform in CY22: Analysts
Say retail investors will stick with markets thanks to sub-par returns from fixed-income investments
The share of retail investors in companies listed on the NSE reached a fresh all-time high of 7.42 per cent at the end of March, from 7.33 per cent as on December 31, 2021, according to primeinfobase.com. In value terms, retail holding touched a record ~19.16 trillion as on March 31, from ~19.05 trillion at the end of the previous quarter — an increase of 0.56 per cent.
The sharp correction in equity markets has taken a toll on mid- and small-cap stocks, which have underperformed their large-cap peers. Thus far in calendar year 2022 (CY22), the mid- and small-cap indices on the BSE have slipped over 8 per cent and 7 per cent, respectively, as compared with a fall of around 6 per cent in the S&P BSE Sensex.
While investors dumped mid- and small-cap stocks over the past few weeks, analysts still expect these two segments to see good investor interest from a mediumto-long-term perspective.
“Despite the recent rise in the interest rates, return from the fixed assets remains in low single digits; metals are down; gold and silver also failed to give any significant return in the recent quarters; cryptocurrencies, too, are struggling; and real estate assets are lumpy one and less liquid. Retail investors will not panic and run away from the markets in this backdrop. Their favourite remains the mid- and small-cap basket. CY22 may even see these two segments outperform despite the near-term headwinds,” said G Chokkalingam, founder and chief investment officer at Equinomics Research.
A K Prabhakar, head of research at IDBI Capital, too, is positive on mid- and small-caps and expects the segments to outperform, especially in CY23.
He, however, warns of intermittent corrections in CY22 in these two segments, given the overall market sentiment. A large part of this outperformance he ascribes to retail investors, who have been thronging the markets in search for better returns on investments.
“The retail investor base has doubled in the last one-two years and they have been buying into the mid- and smallcaps. Despite the nearterm challenges for the markets, mid- and smallcaps are likely to do well in CY23,” he said.
That said, most analysts see near-term pain for global equity markets, including India, which they believe will take time to adjust to the new normal of rising interest rates and liquidity drying up as a result of global central bank action.
The hawkish stance of the US Federal Reserve (US Fed), rate hikes by the Reserve Bank of India (RBI), Bank of England (BOE), and Reserve Bank of Australia (RBA), according to V K Vijayakumar, chief investment strategist at Geojit Financial Services, have already created an atmosphere of riskoff for equities. He suggests that investors should not commit the mistake of aggressively buying on this dip, assuming that prices have seen a meaningful correction.
“We don’t know how long this will last. Even after the correction, Nifty is trading at around 19x FY23 earnings. This is higher than the long-term average of 16x and certainly not buyable valuation, particularly when equity markets globally are facing many headwinds like risk of growth slowdown, Ukraine war and supply chain disruptions caused by stringent lockdown in China. However, long-term investors may start nibbling at high quality stocks in segments like financials where there is valuation comfort,” he advises.
The pull-back from the 16,400 level on Friday proved to be too feeble to attract fresh buyers, said a technical analyst from a local brokerage, as bearish vibes continued to keep the 14,500 level fears alive. “Investors now need to watch out for 16,250 levels on the Nifty. Inability to hold above this level can see the 50-share index slip to 15,800 levels before buyers regroup,” he said.
The pull-back from the 16,400 level on Friday proved to be too feeble to attract fresh buyers, said a technical analyst from a local brokerage, as bearish vibes continued to keep the fears of 14,500 level alive