Dalal Street minnows stole the show in 2024, giving handsome returns to investors, helped by a largely optimistic trend in the stock market and impressive retail investors' participation.
Analysts attributed the positive trend in the equity markets, where the benchmark indices shattered many records this year, to robust domestic liquidity, strong fundamentals of the Indian economy, and policy continuity.
Market experts are optimistic about midcap and smallcap stocks for the next year, driven by factors like strong domestic consumption and government infrastructure spending.
Till December 23 this year, the BSE smallcap gauge has jumped 12,144.15 points or 28.45 per cent, while the midcap index surged 9,435.09 points or 25.61 per cent.
In contrast, the 30-share BSE benchmark Sensex has soared 6,299.91 points or 8.72 per cent.
"Smallcap and midcap indices outperformed in 2024 due to sectoral growth, policy support, and investor interest.
"Key sectors like real estate, infrastructure, healthcare, and renewable energy, heavily represented in these indices, benefitted from government initiatives and favourable market conditions.
"Improved earnings growth among smaller companies, driven by rising domestic consumption, technological advancements, and programmes like the Production Linked Incentive (PLI) scheme further bolstered performance," Palka Arora Chopra, director, Master Capital Services Ltd, said.
Increased interest from domestic investors seeking higher returns and the valuation catch-up of smallcap and midcap stocks after prior underperformance also played a key role.
These factors collectively positioned smallcap and midcap indices as standout performers this year, Chopra added.
The midcap and smallcap segments tend to outshine their larger counterparts in a bull rally in the market, experts said.
"Despite global economic uncertainties, India's domestic factors, such as infrastructure development, robust consumption, and government reforms, ensured resilience in capital markets.
"While foreign institutional investors (FIIs) engaged in profit-booking due to high valuations, domestic institutional investors (DIIs) consistently supported the market," Chopra said.
The BSE smallcap gauge hit its lifetime high of 57,827.69 on December 12 this year, while the midcap index surged to a record 49,701.15 on September 24.
The blue-chip peer Sensex reached its all-time high of 85,978.25 on September 27.
"Domestic liquidity has been a major driver behind the outperformance of the midcap and smallcap segments.
"Record SIP inflows, predominantly directed towards midcap and smallcap funds, have played a significant role in this trend," Sunil Nyati, managing director, Swastika Investmart Ltd, said.
According to analysts, smaller stocks are generally bought by local investors, while overseas investors focus on blue-chips or large firms.
"Smallcap and midcap indices have outperformed in 2024 due to strong domestic liquidity, increased retail investor activity, and robust growth in sectors like defence, real estate, and infrastructure," Abhishek Jaiswal, Fund Manager, Finavenue, said.
Overall, 2024 has been a good year for retail investors, marked by encouraging market performance, especially in midcaps and small-caps, backed by domestic liquidity and resilience in the face of FII outflows, an expert said.
"CY24 has been a remarkable year for the Indian equity markets, particularly for the smallcap and midcap indices, which have significantly outperformed.
"This stellar performance is attributed to strong domestic liquidity, with DIIs consistently being net buyers, and heightened retail participation through SIPs," according to stock broking firm Bajaj Broking.
The midcap index tracks companies with a market value that is on average one-fifth of blue-chips, while smallcap firms are almost a tenth of that universe.
The BSE benchmark Sensex and NSE Nifty have faced heavy corrections in recent months after a record-breaking rally due to the rich valuations of the domestic stocks.
"Excluding the final quarter of 2024, the Indian equity market delivered strong performance, with investors reaping significant returns in several midcap and smallcap stocks.
"However, the benchmark indices, Nifty and Sensex, lagged behind global markets, particularly the US, primarily due to persistent aggressive selling by FIIs," Nyati said.
In 2023, the BSE benchmark had jumped 11,399.52 points or 18.73 per cent.
The BSE smallcap gauge rallied 13,746.97 points or 47.52 per cent last year, while the midcap index climbed 11,524.72 points or 45.52 per cent.
On the road ahead for the smallcap and midcap stocks in the next year, Chopra of Master Capital Services Ltd, said, "The outlook for smallcap and midcap stocks in 2025 remains cautiously optimistic, driven by strong domestic consumption, government infrastructure spending, and reforms like the PLI scheme".
According to Jaiswal, "The outlook for smallcap and midcap stocks in 2025 is positive, driven by strong economic recovery and government schemes like Atmanirbhar Bharat, PM Gati Shakti, and Production Linked Incentive (PLI).
"These initiatives are expected to boost sectors like defence, infrastructure, manufacturing, and technology, offering robust growth potential."
In 2022, the BSE midcap index climbed 344.42 points or 1.37 per cent, while the smallcap gauge declined 530.97 points or 1.80 per cent.
The BSE barometer ended 2022 with an annual gain of 4.44 per cent or 2,586.92 points.
"The outlook for midcap and smallcap stocks in 2025 remains promising, but the rally is unlikely to be broad-based.
"Investors will need to adopt a more selective approach, as valuations in many areas have become stretched, and growth momentum appears to be lacking in certain sectors," Nyati added.
