Indian market analysis: We are not in a secular bull market as yet

Written by R. Venkataraman | Updated: Oct 21 2013, 19:30pm hrs
Stock MarketIf indices are near high, blame it on their composition. (Illustration: Shyam)
The Indian stock market appears to be within striking distance of hitting all time highs on a closing basis, a milestone which has been evading us for almost five years. We are now a little less than 300 points away from the high NSE Nifty had hit on Jan 8, 2008. The BSE Sensex needs another 600 odd points before it can capture its high of 21,108 hit in November 2010.

As we enter into the festive season, there may not be any spectacular fireworks in store; yet, the market seems to be in a mood to celebrate this time. What is strange is that though levels and new highs are often discussed widely, the retail investor or for that matter even the institutional investors are not really sanguine about allocating more money into equities.

So why is the market not correcting sharply as many people expect or hope The recent rally has in fact confused everyone. Its raining downgrades from rating agencies to IMF and now even the World Bank has downgraded Indias growth. Our research has found that most key economic parameters in FY14 are expected to be the weakest in the past decade or longer. Corporate earnings growth in FY14 is expected to decline to previous lows witnessed in FY02 and FY09. The risk remains on the downside of further cuts in GDP, industrial and earnings growth estimates. FII and DII flows are likely to remain flat to negative at the margin. All this bad news may not be in the price as yet. The Nifty currently trades at 1 standard deviation below its long-term average, but has traded much lower in FY02 and FY09. Meanwhile, the honourable finance minister appears very confident of Indias growth and has more or less dismissed most negative reports as undue pessimism.

What is happening at present is that the market is suffering from a bipolar disorder. There are some stocks that are trading close to all-time highs and there are many stocks that are trading at all-time lows. The entire composition of the market has changed significantly. In the last five years, the Sensex composition has changed; the cyclical stocks have lost weight while the defensives gained an upper hand. This perhaps explains why the market is where it is from an index point of view.

For example, five years ago, the IT and pharmaceuticals space had a lesser weight in the Sensex. The FMCG weightage has also increased constantly in the last five to six years though it is nowhere near the weightage it enjoyed at the turn of the century when Hindustan Unilever alone used to command around 20% weight in the index. Lets take a look at the change in index weight of various sectors in the last few years. In FY08, IT had a 11.9% weightage while in FY14 it has risen to 17.8%. If you look at consumer discretionary and consumer staples, in FY08 the weightage was 3.7% and 7.4%; this has shot up in FY14 to 10.4% and 14.8% respectively. Healthcare is another sector which has added weight. In FY08 it was a mere 2.1% and at present the weight is over 6%. Industrials which used to be heavy at 12.2% in FY08 is now down to a mere 4.8%. Telecom weightage has also dropped from 8.5% to 2.3%. The energy space too has come down with an earlier weightage of 19.2% is down to 12.2% at present. Materials has halved from 8.1% to 4.1%. Financials continue to enjoy more or less the same weight of 23.1% at present as against 22.6% in FY08.

The main indices displaying a show of resilience has more to do with the changing constituents of the Sensex and Nifty. If you see the recent results, both Infosys Ltd and Tata Consultancy Services (TCS) have managed to beat the street expectation by a handsome margin and hence are not showing any immediate weakness. The pharma, FMCG and IT are the sectors that are holding the indices at elevated levels. The other big component of the Sensex is financial services, led by both the private sector and public sector banks. Here again we are seeing a big divergence because the private sector banks continue to trade high whereas the public sector banks have been completely beaten down.

Auto companies like Bajaj Auto beat street expectations and Hero Honda too may clock better numbers. All these companies are expected to be a big beneficiary of the rural demand. Everybody is talking about very good agriculture, very good monsoon and hence demand for two-wheelers will be very high. Amongst the four big results that have come this season, only HDFC Bank has been beaten down because it failed to meet its customary 30% growth target.

As an investor, its very important to have your sector allocation right. If you are lucky and have been overweight on IT, pharma and FMCG, then the last three-four years have obviously been very good for you. However, if you have been stuck with cyclical stocks which include infra or PSU banks, then may be literally weeping your way to the bank.

Hence, the message is very clear. Instead of looking at the Nifty at 6,000 plus and taking a call on the market, pay more attention to sectors and companies which are doing well or expected to do well in the near future. Clearly, the winners will be pharma and IT which are beneficiaries of the rupee depreciation coupled with a recovery in the overseas market. For FMCG, the domestic consumer story is well known and two- wheelers could ride the strong rural demand. Even within these sectors, our feeling is that if the FMCG companies do not get their strategy correct on tapping the rural consumer demand, they will feel the pinch of the overall slowdown because the slowdown is here to stay.

One thing I have learnt from the market is that a bad macro-economy doesnt mean a poor stock market performance and as explained earlier, the Sensex at 21,000 or the Nifty above 6,000 is more to do with the changing component than an overall bullishness in the equity market. I would say we are not in a secular bull market as yet. We are perhaps in a period which is something similar to 1999-2000, when the overall market languished but IT stocks outperformed. So I reiterate, investors, especially the retail investors, should pick their stocks carefully and choose the sectors clearly and then stay tight. If you are very apprehensive of getting it right then a better option is to buy the Sensex or the Nifty itself because over the time, as the market matures, it will be more and more difficult, even for seasoned fund managers to beat the main indices.

The author is managing director, India Infoline Group