Smallcap indices largely failed to match largecap barometer Nifty50 in 2022. But 2023 could be different. Valuations of smallcap indices still look a bit high when compared with historical valuations, but analysts see them recovering in 2023. That, based on historical return trends.
Since 2005, the Nifty Smallcap100 has only had five instances of negative returns. With the exception of one case in 2019, the index produced a return of more than 20 per cent the following year, said Sunil Nyati, Managing Director at Swastika Investmart.
For the year 2022, the Nifty Smallcap 100 index fell 13 per cent against a 4 per cent rise in the Nifty50
Nyati said margins for smallcap companies would increase due to the reduction in raw material costs and interest charges, thanks to easing of inflation and interest rates. He said the worst is behind us in terms of inflation and that the outlook of Indian economy is promising.
“We can expect smallcap pack to rebound in 2023,” the analyst said.
Vinod Nair of Geojit Financial Services noted that Nifty Smallcap100 is trading at a 1-year forward P/E of 16.5 times, moderated well from a high of 24 times and, thus looks attractive.
“However, when comparing a peer analysis with large caps, it is trading at a discount of 11 per cent compared to Nifty50 index. Historical peer-to-peer valuation range is a premium high as 15 per cent and a low discount of 35 per cent. The 10-year average is a discount of minus 17 per cent. This suggests that small caps are still trading at marginally above historical averages. The year 2023 can be considered as a good year to accumulate high quality small caps.,” he said.
Vikram Kasat- Head Advisory, Prabhudas Lilladher said that smallcaps would do good going ahead. Investors should better know the management and growth vision, especially when it comes to small cap companies, he said.
Marc Despallieres. Chief Strategy & Trading Officer at Vantage, meanwhile, noted that small caps carry greater risk than mid or large-caps, and also offer higher returns.
“In 2022, the Nifty Smallcap 100 has lost about a sixth of its value. We may see a year of mean reversion, where the smallcap index starts climbing once again. But, bear in mind, that the real money is to be made in individual smallcaps. Buying in such stocks could be a high-risk approach to investing,” he said.
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