333 stocks from S&P BSE500 shed 20% or more, enter bear territory

Most stocks have fallen far more than the headline index number would suggest.

A bear market is one in which an index has fallen 20 per cent or more. The S&P BSE Sensex is down 8.1 per cent from its 52-week high. The broader S&P BSE 500 has fallen 9.4 per cent. The majority of its constituents have done considerably worse. The median stock is down 23.6 per cent.  

A total of 333 stocks out of the S&P BSE 500 have fallen 20 per cent or more. The index accounts for more than 95 per cent of the total value of India’s listed universe. Around 65 companies or more than a tenth of the stocks which make up the index, have fallen more than 40 per cent. The difference is because index returns are calculated based on different weights assigned to individual companies.

The spread can be seen in the difference of the top and bottom decile of stock returns. The top one-tenth of stocks have fallen 8.3 per cent on a median basis. The bottom one-tenth shows a median fall of 46 per cent. The median uses the middle value in a range of numbers. It is considered more representative of the sample in some cases because a simple average can be skewed by a few large numbers.

The stock market has been under pressure because of geopolitical tensions around Ukraine. Investors also anticipate that global central bank action will negatively affect markets. Central banks are expected to raise interest rates and bring down the liquidity available in the global financial system amid higher inflation. This is widely expected to have a negative impact on Indian stocks. Foreign investors who bought when liquidity was ample are expected to sell when the situation reverses.  

Foreign portfolio investors have been net sellers by Rs 84,927 crore so far in 2021-22. This may not be the only determinant of how stocks are doing. Companies with high foreign stake did better than those with lower stake, shows an analysis of the latest available numbers.

The top one-tenth of stocks in terms of returns had a median 14.86 per cent foreign stake. It was 10.34 per cent for the bottom one-tenth in terms of returns. The trend was different if one looks at the correlation of returns with companies’ indebtedness.

Companies in the top decile had a lower debt-to-equity ratio than companies in the bottom ten per cent of stocks in terms of returns. The debt-to-equity ratio measures the amount of money that the company borrows for its operations relative to the money brought in by its owners. The higher the ratio, the more indebted the company is generally considered to be.

The underperformance of the broader market comes even as profits have become less concentrated in the top companies. Earnings growth was positive in nine out of ten sectors, according to a February 21 India Equity Strategy report from the India arm of global financial services major Morgan Stanley. Sectors including materials and financials recorded the highest earnings growth, according to the report from equity strategists Ridham Desai and Nayant Parekh, and equity analyst Sheela Rathi.

“Share of top companies in net profit is now close to cycle low levels...About half the companies in our universe reported double-digit profit growth, albeit down QoQ (quarter-on-quarter),” it said.