BSE smallcap, midcap indices skid up to 4% this year so far; Sensex down 2%

The BSE smallcap and midcap indices have underperformed the benchmark gauge so far this year, falling up to 4 per cent, with experts saying a hawkish US Fed and soaring inflation may lead to more market volatility in the near term.

Domestic equity markets have faced many headwinds in recent times like the emergence of geopolitical tensions, inflation concerns and FII selling, analysts said.

“Markets need just a single reason to fall when they are trading at all-time highs. And this year has been full of negative surprises like Ukraine war, record FII selling, global economy losing its growth momentum, inflationary headwinds,” said Parth Nyati, Founder, Tradingo.

He explained that the smallcap and midcap indices consist of stocks that have characteristics like high growth, high return and high volatility.

“In other words, both losses and gains are magnified compared to the large index. Thus, during a market fall, small and midcap indices underperform the largecap index,” Nyati added.

The BSE smallcap index has tumbled 1,095.98 points or 3.72 per cent so far this year, while the midcap gauge has lost 666.1 points or 2.66 per cent.

In comparison, the Sensex is down 1,277.83 points or 2.19 per cent till May 2 this year. Stock markets were closed on Tuesday (May 3) for Eid.

Nonetheless, there is no significant underperformance by the broader market, Nyati said. “This underscores the strength of our domestic flows.”

Experts noted that rate hikes by the US Federal Reserve and inflation are the key factors that may cause near-term volatility, whereas the Russia-Ukraine issue is still unresolved. 

Apart from this, earnings will be a key factor for the overall direction of the market, they said, adding that monsoon will also remain an important element for the domestic economy going ahead.

“The Indian equity market is consolidating after a good performance last year and it is the resilience of the Indian equity market that we are seeing just time wise correction despite lots of headwinds like relentless selling by FIIs, geopolitical tension, inflation, probability of aggressive rate hikes etc.

“We are outperforming most of our global peers as the outlook of the Indian economy looks promising amid short-term challenges. There is no significant underperformance by the broader market. However, there are many pockets in the broader market that are doing extremely well, especially commodity-related stocks,” said Sunil Nyati, Managing Director at Swastika Investmart Ltd.

According to market analysts, small stocks are generally bought by local investors, while overseas investors focus on blue-chips or large firms.

Experts said in the last seven months the market had to deal with lots of challenges like historic selling by foreign institutional investors (FIIs), inflation, geopolitical tensions, worries of aggressive rate hikes by central banks, growth fears, among others.

“All these caused volatility in our markets but thanks to domestic money flow and a better economic outlook, we managed to deal with most of the tides very well,” Nyati of Swastika Investmart said.

The BSE midcap gauge hit its 52-week high of 27,246.34 on October 19 last year, after falling to its one-year low of 20,184.21 on May 4, 2021.

The smallcap index tumbled to its 52-week low of 21,846.86 on May 4 last year and hit its all-time peak of 31,304.44 on January 18, 2022.

The 30-share BSE Sensex scaled its record high of 62,245.43 on October 19, 2021. It hit its 52-week low of 48,149.45 on May 4 last year.

On the road ahead for smallcap, midcap and the frontline index Sensex, Sunil Nyati said it is difficult for the market to move significantly higher amid lots of headwinds, where inflation is the biggest challenge. 

However, most of the pain is already digested without much fall in the market, therefore it may do well if things improve from here.

“If FIIs come back to the market then we can expect outperformance by headline indices Nifty and Sensex in the near-term. However, over the long run, midcap and smallcap tend to outperform as the Indian equity market is a long-term bull market,” he noted.

Small stocks had put up a stellar show in 2021, giving returns of 63 per cent.

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