Outlook 2023: Mid, smallcaps could outperform large-caps

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Outlook 2023: Mid, smallcaps could outperform large-caps

We expect divergence in returns across sectors with investment theme as 3Cs – Credit, Capex and Consumption:

With sustained recovery in economy and earnings, investments in quality mid & small-caps make sense. Know the 4 sectors that an analyst is positive on:

The year 2022 was dominated by inflation shocks, sharp interest rate hikes and market volatility. It has been a rollercoaster ride for the global market as well as for the Indian market, led by global macro uncertainties, including geo-political tension, heightened inflation print, rate tightening, economic slowdown and lastly re-emergence of covid-19 fears. In this backdrop, Indian equities have delivered a stellar and sharp outperformance for the year gone by with the Nifty 50 and Sensex clocking all-time high during early part of December. The Nifty outperformed the Dow Jones and MSCI EM by 22% and 29%, respectively, till November 30, 2022.

Amid all of this, 2023 looks like a battle between positives and negatives! At this stage of growing global macro uncertainties and re-emergence of covid-19 concerns, there is nearly a unanimous consensus of global growth slowdown in 2023. The multiple macro-economic headwinds of the 2022 global economic slowdown will continue to weigh on the global equities market and India may not remain insulated from it, however its impact will be lesser.

Nevertheless, India’s strength lies in the robustness of domestic consumption and government proactiveness in building domestic infrastructure and making India a global hub for global manufacturing. Further, healthy corporate earnings growth over next 2-3 years coupled with resilient domestic equities inflows and the deftness of the Reserve Bank of India (RBI) in managing inflation. On a 3-5 years perspective, India offers a more secular and stable growth story driven by solid fundamentals. Overall for 2023, we may see another year of decent market uptrend notwithstanding interim volatility and more so we may see bigger outperformance in quality mid- and small-cap space.

We expect divergence in returns across sectors with investment theme as 3Cs – Credit, Capex and Consumption. Accordingly, we are positive on banks & financials, consumer discretionary companies including autos/auto ancillary, engineering companies along with real estate and building material companies. With the real estate market looking up and the private sector capex cycle showing signs of an uptick across sectors, Indian economy seem set for a multi-year upcycle over the next 3-5 years. Both real estate and private capex upcycle have far-reaching impact on the economy in terms of demand in the core sectors like steel, cement, engineering goods etc. The government has also shown its intentions to further accelerate investment in infrastructure development. Indian economy is likely to tide over the adverse impact of slowing global economy and still grow at healthy 6-6.5% CAGR over FY2022 to FY2025.

As an investor, one needs to stay invested in the right quality of stocks, keeping the bigger picture in mind of a multi-year growth up-cycle ahead. We are of the view that it would be prudent to have an exposure to quality small-cap stocks with a strong balance sheet and earnings potential. Small-cap stocks witnessed sharp underperformance vis-à-vis large-cap stocks in 2022 and widened valuation gaps. With sustained recovery in economic momentum and corporate earnings, investments in quality mid-caps and small-caps make sense.

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