Markets heading for a third straight year of narrow stock participation

Weak underlying economic trends may keep market interest limited to select stocks

Much has been said about how the CNX Nifty at over 11,850 points defies logic, given the underlying economic trend remains uninspiring and that corporate earnings, despite relief from tax rate cuts, were a damp squib in the July-September quarter.

With little optimism in sight at least in the near-term, market experts feel the Indian equities are headed for a third straight year of narrow stock participation.

They expect 2020 to hit a hat-trick, in terms of the same stocks contributing to the broader markets’ rally.
“Risk-reward at current levels is less attractive and hence, the construct of a narrow market remains intact,” says Gautam Chhaochharia, head of India research, UBS.

Experts at Jefferies also echo similar views. A recent note titled ‘GREED & Fear’ authored by Christopher Wood, global head of equity strategy, Jefferies, captures the rationale of the narrowness in the market. “The remarkable point about the Indian stock market is how resilient the Sensex has been in the face of grim economic news and continuing earnings downgrades. The resilience is primarily because of the narrowness of the rally. It has paid off to pay up for quality,” Woods points out in his note.

To put things in context, a rally is considered to be narrow if returns of more than half the stocks constituting the index are in the negative zone. In 2018, if the Nifty rose 3.2 per cent, just 22 of the 50 stocks ended the year in the positive territory, though all of them outperformed the benchmark index by a reasonable measure.

The current year is no different in terms of stock participation. On a year-to-date (YTD) basis, despite the Nifty gaining 9.5 per cent, 27 stocks trade in the negative zone. However, the stocks underperforming the index are higher — 31 stocks.

Unlike 2018, only a few stocks — 19 to be precise — have managed to outperform the bell-weathered index, making the current year’s rally narrower than 2018’s. Gains so far have been broadly led by heavyweights such as Bharti Airtel, Bajaj Finance, ICICI Bank, Reliance Industries, and Bharat Petroleum Corporation (BPCL).

Interestingly, barring names such as Bharti Airtel and BPCL, the list of gainers for 2019 (YTD) is somewhat similar to that of the previous year (see table).

Saurabh Mukherjea, founder and chief investment officer, Marcellus Investment Managers, who also feels that markets are headed for a narrow rally in 2020, says much of the scepticism is to do with the fact that the Indian economy stares at a slowdown.

“Rallies tend to be narrow in such a phase, as investors’ chase for quality becomes pronounced,” he explains. But what could change the course for stocks is if there is mild recovery in the economy, which Mukherjea is hopeful of, considering the recent reforms led by the government.

Chhaochharia, though, believes otherwise. Reforms are a reversal of the tight policies and not really the much-needed stimulus for economic growth, he opines. “Market is not pricing the risk of growth remaining stagnant at 4.5 per cent or falling lower,” he warns.

UBS has rolled over its current Nifty target of 12,300 points for calendar year 2020, indicating the brokerage isn’t very optimistic about the year ahead.

The coming week will see most brokers publishing their target for Nifty in 2020. How much they expect the market to hold up will soon be known.