Small cap shares have underperformed the markets this year till now.

Smallcap stocks underperform this year.

Returns from Small cap companies have been disappointing this year

The year 2022 has started to a shaky start for the stock markets. Stock market losses this year have kept the investors on the sidelines. The Nifty has lost almost 1400 points since the start of the year. In percentage terms, the Nifty losses are 8% YTD. This share market loss is not limited to the big stocks. Smallcap stock losses are more than the big stocks. The Nifty Smallcap 100 index has lost 2700 points YTD. In percentage terms, the smallcap losses are 23.5% YTD. 

Related: What you should know before investing in small-cap companies

Reasons for losses

There are many reasons for the underperformance of the stock markets this year. Some of the reasons for the stock market losses this year are:-

  1. Increase of interest rates by the Federal Reserve and the RBI- This year was marked by high inflation. To contain inflation, central banks globally have hiked the interest rates, which has increased the cost of capital. This has led to the underperformance of the share market this year. 
     
  2. Russia-Ukraine war - The war in Europe has led to uncertainty in the financial markets. Also, the supply constraints because of the war are causing inflation that is hampering the growth of the companies. This results in losses for the stock markets.
     
  3. Correction after a good bull run- The bull run in the stock markets during the pandemic fuelled excesses in the stock markets. Some of the excesses are getting corrected now. This is resulting in a weak year for the stock markets.

These reasons are resulting in share market losses this year. But the underperformance of the smallcap stocks as compared to the largecap stocks is also pronounced this year. The reasons for smallcap underperformance are:-

  1. Smallcaps outperformed in the preceding two years- Since the pandemic started, smallcap stocks have outperformed the largecap stocks. Many smallcap stocks have become multibaggers in the last two years. This excess is now getting corrected, and the mean reversion is in play.
     
  2. Smallcaps perform better in good times and worse in times of uncertainty- It is well known that smallcaps outperform in good times and underperform in bad times. Smallcaps usually have a higher beta. Now that there is uncertainty in the markets, smallcaps are underperforming the markets. 

Also read this article to understand the risks you must consider before investing in small-cap and mid-cap companies.

The smallcaps are underperforming the markets this year. This underperformance is along the expected lines as there is uncertainty in the share market. In times of uncertainty, the smallcap stocks underperform the markets, and in good times the small-cap stocks outperform the markets. The stock markets have underperformed so far in 2022 because of the increase in interest rates by the central banks and the Russia-Ukraine war. Also, the excesses of the pandemic are getting corrected this year. This year the small-cap indices have lost money:-

This year the small-cap indices have lost money

Are you falling prey to recency bias? Read this expert article by Saikrupa Chandramouli to find out How recency bias impacts your investing decisions

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