Small-cap stocks on a roll, beat blue-chips for second straight year

New Delhi: On Dalal Street, it was minnows ruling the roost in 2015 as mid-cap and small-cap stocks beat their blue-chip peers for the second year in a row with an average return of up to six percent.

As the year 2015 draws to a close, mid-cap and small-cap stocks of the BSE have rallied by nearly six percent and five percent, respectively, as against a decline of over six percent in the bellwether BSE index Sensex on a full-year basis.

However, the gains recorded by the medium and small-size companies remained much below the huge returns of up to 60 percent they generated in the previous year 2014.

"Growth expectation from markets increased tremendously in 2014 when for the first time in 40 years a single largest party came to power. However, due to political compulsions the fireworks did not go off as expected," said SAMCO Securities' CEO Jimeet Modi said.

"Markets had already built in those growth expectations which eventually were belied and markets corrected in 2015.

The large-caps having huge businesses could not deliver those growth numbers but small and mid-cap could, due to their nimbleness and lower base effect, this lead to their lesser down fall than large-cap," he added.

The Sensex touched an all-time high of 30,024.74 on March 4 this year, while it hit a one-year low of 24,833.54 on September 8.

The mid-cap index scaled its record high of 11,666.24 on August 10 and a low of 9,983.55 on May 7.

The BSE small-cap index hit its all-time high of 12,203.64 on August 5 and a low of 10,178.98 on August 25.

"This year, the Sensex and Nifty are down by around 7 percent so far. This comes after a spectacular return of around 30 percent in 2014. In 2014, market ran ahead of fundamentals expecting a rebound in GDP growth and corporate earnings growth in FY'16," said V K Vijayakumar, Investment Strategist, Geojit BNP Paribas.

"This expectation did not materialise and therefore the market corrected. However, mid and small-caps continued to do well. And, the party is still on," he noted.

Most of the major Sensex and Nifty stocks have huge external exposure through exports and commodity prices. Since exports have been doing poorly and metals and commodities have been bleeding, this segment suffered.

On the other hand, most mid and small-caps have domestic orientation and therefore, they have been benefiting from the nascent domestic cyclical recovery, Vijayakumar said.

Market experts said that FIIs (Foreign Institutional Investors) have been continuously selling since August 2015, while Domestic Institutional Investors (DIIs) have been buying through out the year.

Domestic equities suffered their bloodiest carnage on August 24, when the Sensex crashed by 1,624.51 points -- its biggest single-day fall -- and over Rs 7 lakh crore got wiped out from the investors' wealth on a sharp global sell-off triggered by a rout in Chinese markets.

"In 2015, movement of equities can be termed as range-bound as markets remained glued to various uncertainties with respect to the outcome of Chinese economy, Fed policy, growth in Japan and European markets.

"On the domestic ground, markets were worried by inflation trend in India despite uninterrupted efforts by the central bank.

Further the inability of the government to get pass through key bills kept markets weak as many FIIs felt decrease in confidence in the government to pace up the reforms," said Hiren Dhakan, Associate Fund Manager, Bonanza Portfolio.

These facts kept the markets range-bound and somewhat weak in the year 2015, he added.

Shares of mid-cap and small-cap indices outperformed the Sensex -- indicating that overall breadth of the markets remained positive, which showed the presence of retail participation remained intact, Dhakan said.

Motilal Oswal Securities, VP-Midcaps Research, Ravi Shenoy said: "This has been the year of small and mid-cap stocks with stocks returning more than 100 per cent moving beyond the three digit number."

"FIIs have turned sellers in the latter part of this year and with major part of their holdings in large-caps, this set of stocks which are largely a part of the Sensex have been under pressure," Shenoy noted.

Market players say smaller stocks are generally bought by local investors, while overseas investors focus on blue-chips.

The mid-cap index tracks companies with a market value that is on an average one-fifth of blue-chips or large firms.

Small-cap firms are almost a tenth of that.

On expectations for the new year, Vijayakumar said: "We expect economic recovery to gather momentum, going forward and Sensex and Nifty will reach record levels. Double digit returns are possible in 2016. Large-caps will do well along with quality mid-caps."

In terms of valuation, the market valuation of Sensex companies rose by just Rs 46,086 crore to Rs 98,82,086 crore so far this year.