Mid, smallcaps may outperform in 2022 despite near-term headwinds: Analysts

The sharp correction in equity markets has taken a toll on mid-and-small cap stocks that have underperformed their large-cap peers.

Thus far in calendar year 2022 (CY22), the mid-and-small cap indexes on the BSE have slipped over 8 per cent and 7 per cent respectively, as compared to a fall of around 6 per cent in the S&P BSE Sensex.

While investors dumped mid-and small-cap stocks as the markets remained choppy over the past few weeks, analysts still expect these two segments to see good investor interest from a medium-to-long term perspective.

"Despite recent rise in the interest rates, return from the fixed assets remains in low single digit; metals are down; gold and silver also failed to give any significant return in the recent quarters; cryptocurrencies, too, are struggling; and real estate assets are lumpy one and less liquid. Retail investors will not panic and run away from the markets in this backdrop.

"Their favourite remains the mid-and small-cap basket. CY22 may even see these two segments outperform despite the near-term headwinds," said G Chokkalingam, founder and chief investment officer at Equinomics Research.

A K Prabhakar, head of research at IDBI Capital, too, is positive on the mid-and-small caps and expects these two segments to outperform in CY23.

A large part of this outperformance, he ascribes to the retail investors, who have been thronging the markets in search for a better return on their investment.

“The retail investor base has doubled in the last one-two years and they have been buying into the mid-and small-caps.

"Despite the near-term challenges for the markets, mid-and-small caps are likely to do well in CY23,” he said.

That said, most analysts see near-term pain for the global equity markets, including India, which they believe will take time to adjust to the new normal of rising interest rates and liquidity drying up as a result of global central bank action.

The hawkish stance by the US Federal Reserve (US Fed), rate hikes by the Reserve Bank of India (RBI), Bank of England (BoE) and Australian Central Bank (ACB), according to V K Vijayakumar, chief investment strategist at Geojit Financial Services, has already created an atmosphere of risk-off for equities.

He suggests investors should not commit the mistake of aggressively buying on this dip, assuming that prices have seen a meaningful correction.

“We don't know how long this will last. Even after the correction Nifty is trading at around 19x FY23 earnings.

"This is higher than the long-term average of 16x and certainly not buyable valuation, particularly when equity markets globally are facing many headwinds like risk of growth slowdown, Ukraine war and supply chain disruptions caused by stringent lockdown in China.

"However, long-term investors may start nibbling at high quality stocks in segments like financials where there is valuation comfort," he advises.

The pull-back from the 16,400 vicinity on Friday proved to be too feeble to attract fresh buyers, said a technical analyst from a local brokerage, as bearish vibes continued which keeps the 14,500 fears in play.

“Investors now need to watch out for 16,250 levels on the Nifty.

"Inability to hold above this level can see the 50-share index slip to 15,800 levels before buyers regroup,” he said.