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The resilience shown by India's benchmark stock market indices has more to do with their changed composition and is not reflecting the current economic slowdown, says CRISIL Research.
Despite growth in gross domestic product coming down sharply from levels of around nine per cent to just around five per cent over the past five years, the Nifty and the Sensex continue to hover near their five-year highs.
On the BSE, the Sensex ended at 19,230 on Tuesday; the National Stock Exchange’s Nifty closed at 5,700. “Today, while the index seems to be holding up to 2008 levels, it is less reflective of the economy and does not seem to convey the worsening macro-economic situation,” the rating agency said in a report titled '2008 to 2013: A tale of two Nifty(s)'
The index is being driven to almost January 2008 levels by “changing dominance and outperformance” of sectors such as information technology, pharmaceuticals, fast moving consumer goods and private financials, which now account for 65 per cent of the Nifty weightage compared to just 29 per cent in 2008. Meanwhile, the weightages of beaten down sectors such as infrastructure, capital goods, power and real estate has come off from 66 per cent in 2008 to about 30 per cent.
“Stocks in the consumer-orientated and private sector financials have benefited from the consumption boom and government policies, while IT and pharma have received support from recovery in the global economy and a weakening domestic currency,” said CRISIL. The concentration of the top 10 stocks in the Nifty has increased to nearly 60 per cent from 53 per cent in 2008.
“The polarisation towards a few sectors and among the top-10 stocks signifies increasing risk aversion among investors. While, the consumption and export-linked sectors have provided resilience to the index,” CRISIL said. It believes the actual reflection of the gloom is that a little over 550 of the most traded stocks have fallen about 50 per cent in the past five years. Also, the weighted average price to book (P/B) multiple of these companies shrank from 7.3 times in 2008 to 1.7 times in 2013.
Despite growth in gross domestic product coming down sharply from levels of around nine per cent to just around five per cent over the past five years, the Nifty and the Sensex continue to hover near their five-year highs.
On the BSE, the Sensex ended at 19,230 on Tuesday; the National Stock Exchange’s Nifty closed at 5,700. “Today, while the index seems to be holding up to 2008 levels, it is less reflective of the economy and does not seem to convey the worsening macro-economic situation,” the rating agency said in a report titled '2008 to 2013: A tale of two Nifty(s)'
The index is being driven to almost January 2008 levels by “changing dominance and outperformance” of sectors such as information technology, pharmaceuticals, fast moving consumer goods and private financials, which now account for 65 per cent of the Nifty weightage compared to just 29 per cent in 2008. Meanwhile, the weightages of beaten down sectors such as infrastructure, capital goods, power and real estate has come off from 66 per cent in 2008 to about 30 per cent.
“Stocks in the consumer-orientated and private sector financials have benefited from the consumption boom and government policies, while IT and pharma have received support from recovery in the global economy and a weakening domestic currency,” said CRISIL. The concentration of the top 10 stocks in the Nifty has increased to nearly 60 per cent from 53 per cent in 2008.
“The polarisation towards a few sectors and among the top-10 stocks signifies increasing risk aversion among investors. While, the consumption and export-linked sectors have provided resilience to the index,” CRISIL said. It believes the actual reflection of the gloom is that a little over 550 of the most traded stocks have fallen about 50 per cent in the past five years. Also, the weighted average price to book (P/B) multiple of these companies shrank from 7.3 times in 2008 to 1.7 times in 2013.
The rating agency is of the view that for a sustainable uptick in the market there has to be “policy impetus towards investment-linked sectors”.
