2021 Ahead: Amid pandemic gloom, small stocks make dashing comebacks

New Delhi, Dec 30: Small stocks made a dashing comeback in 2020 after delivering negative returns in the last two years as increased retail investor participation in pandemic times saw small cap index surging up to 31 per cent and outperforming the bigger benchmark gauge.

This year turned out to be eventful for the equity market, witnessing bearish and bullish sentiments at different points of time. While the initial part of COVID-ravaged 2020 saw the bears in full force amid concerns related to the pandemic and lockdowns hurting economic activities, bulls made a comeback towards the latter half of the year.

As the market swayed with many lows as well as highs, small and mid cap indices emerged as markets favourites in 2020. "During March lows, many mid and small cap companies were trading at extremely attractive valuations as compared to large cap stocks. Hence, valuations coupled with ample liquidity in the markets took the mid and small cap stocks to higher levels.

"Also, in the last 6-8 months retail participation has increased multi-fold due to which we have seen huge traction in these stocks along with the large cap stocks," Hemang Jani, Head and Equity Strategist at Motilal Oswal Financial Services (Broking & Distribution) said.

Till December 29 this year, the BSE midcap index has jumped 2,842.99 points or 18.99 per cent, while gains have been sharper for the small cap which zoomed 4,268.3 points or 31.15 per cent.

In comparision, the BSE benchmark Sensex has clocked 6,359.34 points or 15.41 per cent gain so far this year. March turned out be a nightmare for the domestic stock market, with the benchmark Sensex plunging a whopping 8,828.8 points or 23 per cent during the month as concerns related to the impact of the coronavirus pandemic on the economy rattled investor sentiments.

Rusmik Oza, Executive Vice President and Head of Fundamental Research at Kotak Securities said the reason for the outperformance of mid cap and small cap indices this year is due to their under performance in the previous two calendar years.

The mid cap index dropped to its one-year low of 9,555.24 on March 24 before surging to its 52-week high of 18,017.56 on December 17. In a similar fashion, the small cap index crashed to an all-time low of 8,622.24 on March 24 but bounced back to scale a one-year high of 18,089.16 on December 29.

During the year, the benchmark 30-share Sensex touched its one-year low of 25,638.9 on March 24. Recovering the lost ground, the key index soared to a record high of 47,807.85 during the day on December 30.

If economic revival is strong and retail participation is on a higher side, mid cap indices may continue to outperform the larger indices in the next year too. IPO pipeline will also be a factor to watch out for retail participation.