Sensex, Nifty set to gain for seventh straight year; smallcaps underperform

The underperformance of the small-caps, according to analysts, was mostly due to rising raw material prices and the hike in rates by central banks, which in turn impacted their financial performance

Small-cap stocks remained under pressure in calendar year 2022 (CY22) with their gauge on the NSE – the Nifty Smallcap 250 index – slipping 5 per cent during the year. On the other hand, the S&P BSE Smallcap index, too, underperformed with a fall of 4 per cent during this period, data show.

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This at a time when the frontline indexes – the S&P BSE Sensex and the Nifty50 – outperformed their global peers with a gain of around 3 per cent each during the year and hit a fresh all-time high in December. 2022 marks the seventh consecutive calendar year of positive return for the Sensex and Nifty.

The underperformance of the small-caps, according to analysts, was mostly due to rising prices of raw materials and the hike in rates by central banks, which in turn impacted their financial performance.

“A correction in mid-and small-caps was due to rising interest rates, which impacted them more as compared to their large-cap peers. In a relatively small company, one cannot pass on the cost increase to the consumers easily, and these are difficult times. That said, valuations of a number of mid-and small-caps have become attractive. Both these segments should start to outperform in the second half of 2023,” said A K Prabhakar, head of research at IDBI Capital.

Meanwhile, out of BSE500 stocks as many as 55 per cent or 272 stocks have recorded negative returns in CY22. Stocks of new-age companies like, One 97 Communication, the parent company of PayTM, food delivery firm Zomato, FSN E-Commerce Ventures, the parent company of Nykaa and PB Fintech, the parent of online insurance aggregator Policybazaar, stock prices more than halved during CY22.

Among specific stocks and sectors, the public sector undertaking (PSU) companies outperformed the market, with the S&P BSE PSU index surging 20 per cent in CY22. The index had zoomed 41 per cent in 2021.

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“It was a disappointing year for the markets with most of the favourite stocks of 2020 and 2021 underperforming. The PSU stocks, especially in the defence and the BFSI space did well. Russia – Ukraine war, consecutive rate hikes by central banks impacted sentiment and also hit corporate earnings. The renewed Covid-related fear is also dampening sentiment,” said Ambareesh Baliga, an independent market expert.

Besides the PSU basket, automobiles, private banks, capital goods, power, oil & gas, fast moving consumer goods (FMCG) and metal sectors outperformed the market by recording over 10 per cent return in CY22. Information technology (IT), pharmaceutical and realty sectors, on the other hand, recorded negative returns in the range of 10 per cent to 25 per cent.

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ITC (up 53 per cent), Mahindra & Mahindra (47 per cent), Axis Bank (37 per cent), NTPC (33 per cent) and State Bank of India (SBI) (31 per cent) from the Sensex pack have rallied more than 30 per cent in CY22.

Domestic institutional investors (DIIs) supported the rally and bought a net of Rs 2.72 trillion worth of shares during CY22. Of these, domestic mutual funds bought Rs 1.81 trillion worth of stocks, the official data shows. FIIs, according to reports, sold nearly Rs 1.21 trillion worth of Indian equities in 2022, as the stronger dollar weighed on sentiment toward emerging markets.

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That said, most analysts remain bullish on the road ahead for equities in 2023 with those at Julius Baer expecting the Sensex to hit 70,000 levels in the year ahead.

“We look at India as a longer-term investment than just the next 12 months. We would want to be invested in it for several years to reap the full rewards of an economic upcycle. On a standalone basis, Indian markets have largely been trading in the range of 19-20 times forward earnings. The valuations are rich but justified, considering the country’s corporate sector has delivered consistent growth,” said Mark Matthews, head of research for Asia at Julius Baer.