The Real Story Behind The Rise In The Sensex & Nifty

In a span of three months, the Nifty has shot up from 5495 to 6000. Does the movement of the indices really indicate the true nature of the market direction? Shashikant looks beyond the movement of the broader indices into the reality behind it

The two bellwether indices of the Indian equity market, the Nifty and the Sensex, are trading above the psychological levels of 6000 and 20000 respectively. The stock market has yielded 16 per cent returns in the last one year and 10 percent since its recent low seen on April 9, 2013, which seems fair in context of the current macro-economic environment. This surely tells market watchers that the equity markets are upbeat, and may lead a lay investor to think that all is perfectly well.

Nonetheless, dig a little deeper into the numbers and the picture may look quite different. Surely, many investors who have burnt their finger in the last few months would agree. The reason behind such scepticism is the skewed performance of the scrips that form a part of these indices. At a time when some scrips are touching their lifetime highs, many others are touching new lows or their 52-week lows at any rate. For example, a scrip like Sun Pharmaceutical is up by almost 60 per cent in the last one year and is trading at its lifetime high. In the same period, a company like Tata Steel went down by 40 per cent and is currently trading at its 52-week low.

To get a grip on what lies below the surface and whether or not it is really the right time to step into equities, we have analysed the data of the entire market.

Let’s start with the major indices. For the purpose of our analysis, we have taken into consideration data as on July 19,  2013. There are 52 unique shares that form part of the Nifty index (represented by 50 stocks) and the Sensex (represented by 30 stocks). Out of this, a good 18 shares (35 per cent) are still trading below the level of 5495 which the Nifty touched on April 9, 2013. In the weeks between April 9 and July 19, the index has risen by just short of 10 per cent.

In comparison to the movement of the Nifty, 29 stocks (58 per cent) have underperformed the indices, with returns less than 10 per cent. The major laggards in the performance were companies like Jindal Steel & power, DLF and Ranbaxy, down by 37 per cent, 27 per cent and 25 per cent respectively. Note that the latter two do not form part of the Sensex. Indexwise, there are nine companies on the Sensex and 18 companies on the Nifty that have given negative returns since April 9.

In reality, there are very few movers in the indices that have strongly helped the indices to cross their respective psychological levels. The most important of them are ITC, HUL, RIL and TCS, which carry a combined weightage of 24.32 in the Nifty and are up by 28 per cent, 45 per cent, 19 per cent and 16 per cent respectively. These companies carry a weightage of 31.6 on the Sensex and have helped it to cross the 20000 levels. In all, there are 21 companies that have outperformed the indices and 34 companies have given positive returns in the period of our study.

In fact, such a skewed performance is not limited to the major indices. The story seems to be far worse for the companies outside these  indices. Our attempt to get a clearer picture of what has happened to individual stocks uncovered a can of worms. Since April 9, 834 out of the 1305-odd companies on the NSE are trading at prices below the levels they had seen when the Nifty was at 5495. This means that 64 per cent of them are trading at lower levels than what they traded at three months ago. The story is similar for the BSE listed companies, where the stock prices of 1346 (63 per cent) out of the 2146 traded scrips are lower than what they were at on April 9, 2103. This shows that for every one company whose price has gone up, there are around two companies which saw their prices fall.

Speaking of sectors, the major draggers are steel, construction, mining and public sector banks. At the start of the year, these were the very sectors that were believed to be potential outperformers as Chinese growth was picking up and interest rates were expected to come down and trigger a pick-up in the investment cycle. Of course, as we advanced into the year, Chinese growth faltered, which hit commodities. The interest rates too did not come down as expected, which impacted the rate-sensitive sectors.

In such a volatile situation, investors once again sought succour with the defensive sectors like FMCG and Pharmaceuticals. The IT sector too performed well due to the depreciating rupee as well as a better economic growth outlook in USA, which is a major customer for these IT companies. The recent rise in the scrips of these sectors has made their valuation expensive as compared to their historical averages.

Therefore, we believe that long-term retail investors should not get carried away by the rise in the indices and should take a stock-specific approach to build their portfolios. We do not recommend bottom fishing even for the beaten down stocks, as we believe that they have not quite reached their bottom yet.