The economy hurtling from bad to worse and a deteriorating macro-economic outlook notwithstanding, the CNX Nifty, as on July 31, 2013, was holding on to levels attained way back at the height of the boom period in January, 2008. So at a time when 550-plus stocks among the actively traded ones listed on the National Stock Exchange (NSE) have tumbled by more than half over the past five years, is it interesting to figure out exactly what is keeping the index up at near January 2008-levels?
The answer, according to Crisil Research, lies in the changing dominance and outperformance by a few sectors in the overall index, such as consumer staples, consumer discretionary, private sector financials and export-oriented sectors such as IT and pharma.
More importantly, these stocks have pretty much replaced stocks from sectors such as materials, industrials, energy, utilities and telecom that were responsible for driving up the Nifty in early 2008. As a result, even as the CNX Nifty index has seen the price-to-book (P/B) valuation dropping from 7.1x in 2008 to 5.1x in 2013, the broader index has been rangebound at January 2008 levels.
Over the past five years, according to Crisil, strong financial performance and an increase in valuations of consumption and export-orientated sectors has led to a rebalancing of the weightages in their favour. These performing sectors — consumer staples, consumer discretionary, private sector financials and export-orientated sectors such as IT and pharma — now command a 65 per cent weightage in the index compared to just 29 per cent in 2008.
On the other hand, back in January 2008, investment-linked sectors such as materials, industrials, energy, utilities and telecom dominated the CNX Nifty, with a weightage of 66 per cent. The weightage of any company or sector in the index is determined by the relative (to other companies or sectors) free-float market capitalisation of the constituents. The current slowdown has resulted in poor performance of these sectors, shrinking valuation multiples and consequent steep drop in the stock prices; thereby lowering of cumulative weightage to 31 per cent by July 2013.
Consumer-orientated sectors and private sector financials, Crisil