Year-ender 2020 | Largecaps underperform mid, smallcaps this year; what to expect in 2021

Largecaps lifted the market to newer highs in January 2020, but COVID-19 spoiled the sentiment across segments and pulled benchmarks as well as broader markets down around 40 percent each from January levels.

After hitting bottom in March, the market picked up momentum and the largecaps led the rally from front, but broader markets played catch up faster in last quarter of this year. As a result, largecaps underperformed Midcap and Smallcaps in 2020, overall.

The BSE Sensex and Nifty50 rallied more than 13 percent each in 2020 to hit a fresh high in December and gained more than 80 percent each from March 23's low. Meanwhile, the BSE Midcap and Smallcap indices rallied 19 percent and 30 percent, respectively, in 2020, and 83 percent and 100 percent, respectively, from March 23 low.

"2020 had seen large swings in the market, a fall of more than 30 percent in the first quarter of the year followed by a sharp 75 percent rally from the lows. Also, the rally this year has been different from intermittent rallies of 2019 and 2018 in the sense that market breadth is very strong," Shailendra Kumar, CIO at Narnolia Financial Advisors told Moneycontrol.

Initially ,the rally was largely led by IT and Pharma stocks, later was driven by other sectors including banking & financials but only banking & financials among sectors closed the year with moderate losses.

The recovery in equity was largely in anticipation of strong economic recovery and earnings growth in coming years given the controlled coronavirus in India compared to western world and vaccine progress. The major driver, so far, has been the liquidity especially after global central banks agreed to keep interest rates low till the economic recovery and continue to support financial markets.

"This calendar year to date the two sectors that have performed exceptionally are BSE Healthcare Index (which is up 60 percent) and BSE IT Index (which is up 50 percent). Hence, most of the stocks that fall under these two sectors have outperformed massively. The basket of Pharmaceutical stocks under coverage is expected to report healthy earnings growth of 32 percent in FY21 followed by 19 percent CAGR for the next two years. IT services companies are witnessing strong deal traction post the pandemic which is providing strong earnings visibility for next two years," Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities told Moneycontrol.

Divis Laboratories, Aurobindo Pharma, Cadila Healthcare, Dr Reddys Laboratories, Cipla, Infosys, HCL Technologies, Wipro, Asian Paints, Avenue Supermarts, UPL, Havells India, Mahindra and Mahindra, JSW Steel, Tata Steel, Sun Pharmaceutical Industries, Reliance Industries and Tata Consultancy Services were biggest gainers in the BSE Largecap index, rising 30-107 percent during 2020.

However, Punjab National Bank, IndusInd Bank, Bank Of Baroda, General Insurance Corporation of India, Coal India, Indian Oil Corporation, ONGC, BPCL, Bandhan Bank, Axis Bank, State Bank of India, HPCL, Bosch, NTPC, SBI Life Insurance Company, HDFC Asset Management Company and NMDC were top losers, falling 10-43 percent in 2020.

"While IT and Pharma companies have seen a sharp revival in their fortune, PSU banks, energy companies and some of the highly valued stocks have still to make a new high," Shailendra Kumar said.

Majority of experts feel the rally may continue in largecaps, but could not outshine midcap and smallcaps in 2021; and the beaten down sectors/stocks or laggards are likely to outperform in the coming year.

"Indian economy and equities after remaining soft for the last three years 2017-20 is starting a new expansion phase. And the forthcoming expansion phase has a strong long-term upside. Though just like any other bull markets there would be sector rotations and some in-between large corrections also," Shailendra Kumar said.

For 2021, Rusmik Oza of Kotak expects select largecaps from beaten down sectors and economy-driven sectors to catch-up in terms of performance.

"Largecap stocks from sectors like power, oil & gas, banks, capital goods and metals which are economy dependent should outperform in CY21. Within defensives select consumer staple or FMCG companies could also deliver better returns due to the sector under performance in CY20," he explained. CYTD the BSE FMCG Index was up 10 percent which is below the 13 percent returns given by the Nifty50.

BSE Auto, Capital Goods, Metal and Power indices gained 9-12 percent whereas Bankex fell 4 percent and Oil & Gas was down 2 percent during 2020.

Amongst other largecaps, he expects select stocks like SBI Life Insurance, Bharti Airtel and Infosys to deliver healthy returns.

On the strategy, Shailendra Kumar said the strategy should be of buying good quality Indian businesses on every decline.

Also, "the rally going forward will favour small and mid-cap stocks slightly as they are coming out of a large decline phase. But unlike the rally of 2016-17, the cap will not be the key determinant of how much upside happens for a single stock rather it would be the quality of the business," he added.