Year Ender 2023: Small Cap Stocks Delivered Big Returns To Investors

Smaller stocks tuned out to be Dalal Street's favourites in 2023 that has emerged to be a 'great year' for equities, rewarding investors with big gains, driven by optimism over the country's macroeconomic fundamentals and heavy retail participation.

Experts said equity markets are experiencing a prolonged bull run and it is during this time that the midcap and smallcap segments tend to outshine their larger counterparts. In comparison, the BSE 30-share benchmark Sensex has rallied 10,266.22 points or 16.87% during this period, according to a PTI report.
The smallcap index scaled its all-time high of 42,648.86 points on December 20 this year and the midcap gauge also reached its record peak of 36,483.16 points on the same day.

The BSE benchmark also hit its lifetime high of 71,913.07 points on December 20. The midcap index tracks companies with a market value that is on an average one-fifth of blue chips while smallcap firms are almost a tenth of that universe, added the PTI report.

Analysts attributed better domestic macroeconomic fundamentals and the confidence of retail investors as the major drivers for the exuberance in equity markets this year.

"When the overall economy becomes robust, small and midcap segments tend to do well," Mukesh Kochar, National Head of Wealth at AUM Capital, said.

Kochar termed 2023 as a 'great year' as far as the equity market is concerned. "We have seen a new high with broad-based participation," he said.

In all bull runs, there has always been a new set of performers and this time PSU, defense and railways emerged as the greatest performers, he said, adding there have been strong Domestic Institutional Investors (DIIs) and retail money in a market where Foreign Institutional Investors (FIIs) were consistently selling, PTI reported.

"Despite FII selling, markets have created a new history with domestic liquidity. Overall a wonderful year for equity participants," Kochar added.

But experts believe that smaller stocks may undergo corrections in the near term after a hefty rally in 2023.

After a turbulent start, the market got its mojo back during the final part of the year.

The smallcap and midcap indices hit their 52-week lows on March 28 this year. The BSE smallcap gauge fell to its one-year low of 26,120.32 points on March 28 while the midcap index hit its 52-week low of 23,356.61 points on the same day, added the PTI report.

The BSE bellwether index hit its one-year low of 57,084.91 points on March 20 this year.

Investors battled a slew of negative news from turmoil in large global banks to macroeconomic concerns.

Selling by foreign investors in September and the outflow continuing in the succeeding month, elevated US interest rates and conflict in the Middle East played havoc in the markets in the month of October, where the BSE benchmark fell nearly 3%, stated the PTI report.

But markets bounced back in the months of November and December.

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

Palka Arora Chopra, Director of Master Capital Services Ltd, highlighted a number of factors that led to markets rally this year, including increased retail investor participation, higher-than-expected GDP growth of 7.6% in the September quarter and investors factoring in expectations of an early rate cut by the US Federal Reserve.