As 2013 draws to a close, stock markets managed to record handsome gains driven by large blue-chips, but small and mid-cap stocks seem to be living up to their nomenclature with huge losses of up to 16 per cent.
The market benchmark appears set to end 2013 on a positive note with a modest gain of over 7 per cent, but such gains are not to be seen in a majority of stocks available in the market, which predominantly include those of mid-size and smaller companies, shows an analysis of various indices.
With just about a week-long trading left in 2013, the BSE's mid-cap and small-cap indices have fallen by about 10 per cent and 16 per cent, respectively, so far this year.
The slump in these two segments is in sharp contrast to their stellar performances last year, when they gave much better returns of up to 40 per cent.
The gains registered by the blue-chip benchmark index Sensex was much lower at about 25 per cent during 2012.
Analysts say that mid-caps and small-caps have under-performed their large-cap peers primarily due to low participation from investors.
Buying appetite is missing in small and mid-cap stocks and large-caps are more in favour since they are in the trading portfolio of most of the funds, they added.
"The reason why the performance of small-cap and mid-cap stocks have not been up to the mark is that retail participation in the markets have been poor.
“Little stock related movement have been witnessed in small-caps and mid-caps this year," Augment Financial Services' Founder and CEO Gajendra Nagpal said.
Marketmen said retail investors have large exposure to mid-cap and small-cap stocks and in the last few months the retail segment activity has dropped significantly.
When things become worse, fears make investors exit these stocks at the lowest valuations, they noted.
"This year the volatility in the overall Nifty-50 stocks was very huge. Also, earnings for the small-caps and mid-caps have fallen in general on account of high interest scenario and fall in GDP.
“In comparison, earnings growth was very high in the large-cap and Nifty-50 stocks and they provided descent returns," said Yogesh Nagaonkar, VP-Institutional Equities, Bonanza Portfolio Limited.
The fall in smaller stocks were largely due to steep decline in the rupee and higher balance sheet stress, an expert said.
Mid-cap and small-cap stocks are generally looked at by local investors, whereas overseas investors' largely prefer to invest in large-cap stocks.
"FIIs, who are the major driver for the Indian stock market, have been bullish on the domestic equity market this year. Overseas investors tend to invest in large-caps and there investment portfolio generally consists of frontline big companies.
“So, Sensex stocks have fared better when compared to smaller stocks," Nagpal said.
Market analysts said heavy FII inflows and good quarterly results by some big companies have helped blue-chip stocks to perform well this year.
Foreign Institutional Investors have bought shares worth Rs 1,10,792.50 crore ($19.72 billion) till December 19, 2013.
Last year, they had pumped in Rs 1,28,359.80 crore ($24,372.20 million) in the Indian stock market.
The rupee had on August 28, 2013, logged its all-time intra-trade low of 68.85 and closing low of 68.80.
A weak rupee makes imports costlier, stoking inflation as well as deficit concerns.
On the outlook for small-cap and mid-cap stocks, Nagpal said: "A lot depend on the next years Lok Sabha polls.
“Markets would react to how the political situation in the country will unfold in May 2014."
Analysts said: "When the economy grows, mid-cap and small-caps lead the gains, but when slowdown comes, they are the worst affected."
All the major triggers are over for stock markets.
The state assembly elections are behind us and there are still five months to go for the Lok Sabha polls, a marketmen said.
In terms of valuation, the market capitalisation for the Sensex blue-chip companies rose by Rs 20,258 crore (Rs 202.58 billion) to Rs 69,42,073 crore (Rs 69,420.73 billion) so far this year.
"2012 was a better year in terms of small-cap and mid-cap as they did the catch up game with large-cap in terms of valuation.
“But as the growth came down for small and mid-caps compared to large-caps in 2013, there was huge valuation gap between the two," Nagaonkar noted.
The Sensex had registered an all-time intra-day high of 21,483.74 on December 9, 2013, while both small-cap and mid-cap indices are far away from their lifetime highs they had scaled on January 8, 2008.
The mid-cap index had touched a lifetime peak of 10,245.81 and the small cap touched an all-time high of 14,239.24 in January 2008.
From small-cap stocks, HDIL tanked 56.7 per cent, while Lanco Infra fell by 53.41 per cent, IRB Infra lost 29.11 per cent and PTC India was down 16.36 per cent.
From aviation space, Kingfisher Airlines slumped 72.87 per cent, Spicejet lost 63 per cent and Jet Airways tanked 53 per cent.
The mid-cap indices track the performance of companies with market value that are a fifth of blue-chip firms (large-caps), while the m-cap of small-cap firms are of almost one-tenth of an average large-cap stock.
Illustration: Uttam Ghosh/Rediff