Analysts attributed the positive trend in the equity markets, where the benchmark indices shattered many records this year, to robust domestic liquidity, strong fundamentals of the Indian economy, and policy continuity. Market experts are optimistic about midcap and smallcap stocks for the next year, driven by factors like strong domestic consumption and government infrastructure spending.

Till December 23 this year, the BSE smallcap gauge has jumped 12,144.15 points or 28.45%, while the midcap index surged 9,435.09 points or 25.61%. In contrast, the 30-share BSE benchmark Sensex has soared 6,299.91 points or 8.72% .

To put that in context, the BSE Sensex had jumped 11,399.52 points or 18.73% in 2023, while the BSE smallcap gauge had rallied 47.52% and the midcap index climbed 11,524.72 points or 45.52%.

“Smallcap and midcap indices outperformed in 2024 due to sectoral growth, policy support, and investor interest. Key sectors like real estate, infrastructure, healthcare, and renewable energy, heavily represented in these indices, benefited from government initiatives and favourable market conditions,” said Palka Arora Chopra, director at Master Capital Services Ltd.

Local interest

Increased interest from domestic investors seeking higher returns and the valuation catch-up of smallcap and midcap stocks after prior underperformance also played a key role.

The midcap and smallcap segments tend to outshine their larger counterparts in a bull rally in the market, experts said.

The BSE smallcap gauge hit its lifetime high of 57,827.69 on December 12 this year, while the midcap index surged to a record 49,701.15 on September 24. The blue-chip peer Sensex reached its all-time high of 85,978.25 on September 27.

Liquidity driven

“Domestic liquidity has been a major driver behind the outperformance of the midcap and smallcap segments. Record SIP inflows, predominantly directed towards midcap and smallcap funds, have played a significant role in this trend,” said Sunil Nyati, managing director, Swastika Investmart Ltd.

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

The midcap index tracks companies with a market value that is on average one-fifth of blue-chips, while smallcap firms are almost a tenth of that universe.

The BSE Sensex and NSE Nifty have faced heavy corrections in recent months after a record-breaking rally due to rich valuations.

Benchmarks lag

“Excluding the final quarter of 2024, the Indian equity market delivered strong performance, with investors reaping significant returns in several midcap and smallcap stocks. However, the benchmark indices, Nifty and Sensex, lagged behind global markets, particularly the U.S., primarily due to persistent aggressive selling by FIIs,” Nyati said.

“The outlook for midcap and smallcap stocks in 2025 remains promising, but the rally is unlikely to be broad-based. Investors will need to adopt a more selective approach, as valuations in many areas have become stretched, and growth momentum appears to be lacking in certain sectors,” Mr. Nyati reckoned.

Published on December 30, 2024