Size matters: Small stocks in dumps as Sensex, Nifty scale new peaks in selective rally
The stock market appears to have rallied big time in 2019, but the benefits remained limited to a select group of big stocks as the small and mid-cap indices delivered negative returns for the second year in a row as against nearly 15 per cent gains clocked by the two big ones -- Sensex and Nifty.
Market participants said the year 2019 belonged to frontline companies and smaller stocks failed to attract investors’ interest vis-a-vis their bigger peers.
“This year’s rally has been driven by FPIs and was restricted to mainly large-caps. FPIs have invested USD 14.4 billion into Indian equities this calendar year which has led to double digit returns in Nifty-50. However, this year’s entire Nifty-50 returns has come post corporate tax cut announcement in September,” said Rusmik Oza, Senior VP and Head of Fundamental Research, Kotak Securities.
“Between early February and third week of September Indian markets went into a serious correction phase after which large-caps recovered meaningfully on the back of FPI flows but mid and small-caps still reeled under pressure,” Oza added.
Barring January, July and August, foreign portfolio investors (FPIs), a major driver for the Indian market, have been net buyers in all months of 2019.
The government in September took markets by surprise after it slashed corporate tax by almost 10 percentage points -- the biggest reduction in almost three decades.
The BSE mid-cap index fell by nearly 3 per cent this year, while losses were even sharper for the small-cap index at about 7 per cent.
The 30-share Sensex, on the other hand, managed to overshadow its smaller peers by climbing over 5,000 points or about 15 per cent. The index also crossed the historic 40,000 mark. In another feat achieved in 2019, the Sensex zoomed 1,921 points on September 20, its biggest single-day jump in a decade after the surprise cut in corporate tax rates.
Religare Broking, VP Research, Ajit Mishra said, “The under-performance of the broader indices can be attributed to the fact that earnings for most of the companies either failed to pick up or recovery was lower than expected. Further, declining economic growth, subdued demand and increased market volatility resulted in investors preferring to take bets on select blue-chips rather than riskier mid and small-cap stocks.” For the large part of 2019, rally in the benchmark indices too was largely led by select large caps. As a result, the breadth of the market itself remained limited leading to underperformance, Mishra added.
According to analysts, smaller stocks are generally bought by local investors, while overseas investors focus on blue-chips.
The BSE 30-share key index touched its 52-week low of 35,287.16 on February 19. But later with improved sentiment it zoomed to its all-time high of 41,809.96 on December 20.
The mid-cap index hit its one year low of 12,914.63 on August 23 and the small-cap touched its 52-week low of 11,950.86 on the same day.
“Mid-cap stocks rallied from FY 2013-14 to FY 2017-18. They under-performed in 2019 as mid-cap stocks entered a consolidation phase. We saw substantial erosion of businesses for small and mid-cap players and therefore the trend is favouring the large-caps.
“Erosion in business for smaller players has happened predominantly due to demonetisation and introduction of GST also had an adverse impact. There are debt issues in many small and mid-cap companies,” Amar Ambani, Sr President and Head of Research – Institutional Equities, YES Securities said.
Analysts said the valuation in mid and small-caps remained stretched as investors were anticipating high earnings growth as well as stable economic growth.
“...There were corporate governance issue in select mid and small companies which further restricted investors from investing in such companies,” Mishra said.
Slowdown in the economy has also hurt mid and small-cap companies more than the large-caps, analysts said.
Small and mid-cap stocks had faced a rough ride last year also as they slumped nearly 24 per cent.
The mid-cap index tracks companies with a market value that is, on an average, one-fifth of bluechips or large firms. Small-cap firms are almost a tenth of that.