Will stocks deliver in 2016?

For Indian equity investors, year 2015 was mixed. The benchmark BSE Sensex ended 5.6 per cent lower in 2015, its worst performance in four years. However, many domestic investors ended the year in the green, thanks to a better show by smaller companies.

The prognosis for the new year varies from a high double-digit rally in benchmark indices to an equally big decline in large-cap stocks as valuation catches up with progressively weak fundamentals.

For domestic investors, the relevant question is whether the dichotomy between large-caps (or benchmark indices) and mid/small cap will persist or the law of averages prevail in the new year. (Click here for table)

For the first time in a decade, the BSE Midcap and Smallcap indices outperformed the benchmark index for a consecutive year. More than half the broadbased BSE 500 companies delivered positive returns in 2015 as domestic investors lapped up second and third-rung stocks either directly or through equity mutual funds.

Their stance was supported by a relatively benign correction in the index, despite weak corporate earnings. Sensex companies earnings decelerated for the fourth consecutive year but index valuation reached a four-year high.

The saviour in 2016 could come in the form of a step-up in public investment as the government fights to avert an economic slowdown. Consumption stocks could also get a boost from the pay commission award. Any delay in domestic growth or a worsening global economic scenario could impact stock market returns.