Small-caps steal a march over Sensex, Nifty; index zooms 35% in FY22

Most analysts expect the markets to remain choppy in FY23 amid multiple headwinds. The ongoing geopolitical crisis, they feel, will keep commodity prices elevated and market gains in check

Even though the frontline indices – the S&P BSE Sensex and the Nifty 50 – are set to post a double digit return for the second consecutive financial year in 2021-22 (FY22) with a gain of 16 per cent and 18 per cent respectively, it is the small-caps where all the action was concentrated in the year gone by.

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The small-cap index on the BSE has surged 35 per cent thus far in FY22 – far outpacing the gains in the S&P BSE Midcap and the BSE 500 indexes that moved up 18 per cent and 20 per cent, respectively during this period.

The strong rally comes on the back of improved earnings and strong inflows from domestic investors in local equities, despite record outflows by foreign portfolio investors (FPIs). Domestic mutual funds (DMFs) have seen a record net inflow of Rs 1.73 trillion in FY22.

However, FPIs have reported a record net outflow of Rs 1.42 trillion ($18.76 billion), the National Securities Depository Limited (NSDL) data shows. In FY21, FPIs had made a net investment of Rs 2.74 trillion ($37.03 billion) in Indian equities, while the DMFs had recorded net outflow of Rs 1.20 trillion.

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“FIIs have sold relentlessly with 80 per cent of the outflows coming from financials and information technology (IT) sectors. FII flows (as percentage of MCap) are now at decade-low levels, and barring a tail risk, appear to have peaked. However, a prolonged conflict may still trigger further selling − we estimate around $7 – 8 billion outflow in such a scenario, similar to the levels seen during the global financial crisis (GFC)," wrote Herald van der Linde, head of equity strategy for Asia Pacific at HSBC in a recent note.

The road ahead

Most analysts expect the markets to remain choppy in FY23 amid multiple headwinds. The ongoing geopolitical crisis between Russia and Ukraine, they feel will keep commodity prices, especially crude oil elevated, which in turn will keep stock market gains in check.

“The doubling in the oil price over the past 12 months is a problem for India. We look for 15 per cent EPS (earnings per share) growth for CY22, with margin pressure due to higher energy prices being small to inexistent in the sectors driving the earnings growth (financial services, IT and oil & gas). Reiterate overweight stance on India and maintain Sensex target at 66,000 levels,” said Mark Matthews, head of research for Asia at Julius Baer.

G Chokkalingam, founder and chief investment officer at Equinomics Research expects the markets to start recovering from April 2022. Once the geopolitical issues thaw, he expects the FIIs to come back to Indian shores in FY23.

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“Small and midcap (SMC) stocks should do well in FY23 as the retail investors continue to hop on to equities. A huge number of SMC stocks remain attractive in terms of valuation. However, we suggest a minimum allocation of around 30 per cent of equity corpus to the large-caps for the sake of easy liquidity, if warranted," he said.

Among sectors, HSBC remains bullish on financials, industrials, information technology (IT), and Pharma along with bottom-up ideas in consumer, energy. ICICI Bank, HDFC Bank, Infosys, Bajaj Auto, Maruti, Larsen & Toubro (L&T), Jubilant, Hindustan Unilever (HUL), Petronet, FSN Ventures, Havells, KEI, Apollo Hospitals and Sun Pharma are their top picks.

Persistent inflation in the US and an increasingly hawkish US Federal Reserve (US Fed) are negative for global equity markets, feels Dr. VK Vijayakumar, chief investment strategist at Geojit Financial Services. US dollar index at 99 levels and the 10-year bond yields at around 2.5 per cent, too, are areas of concern.


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