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 says in a note, have benefited from the consumption boom and government policies, while IT and pharma have received support from the recovery in the global economy and weakening domestic currency. All this at a time when the GDP growth rate has fallen from sub-9 per cent in FY’08 to 5 per cent in FY’13. Crisil Research expects FY’14 GDP growth to be at a moderate 5.5 per cent.
Along with reconstitution of the Nifty, the concentration of top-10 stocks too has changed — it is at a five-year high of around59.1 per cent weightage currently, compared to 53.3 per cent in January 2008. Further, six companies among the top 10 of 2008 have now been replaced. The polarisation towards a few sectors and among the top 10 stocks, though, signifies increasing risk aversion among investors.
“While the consumption and export-linked sectors have provided resilience to the index, Crisil believes that policy impetus towards investment-linked sectors is now critical for any sustainable uptick to the markets at large.”
This was a view echoed by investment bank Goldman Sachs, which on August 3 downgraded Indian stocks to ‘underweight’ and recommended investors to stay selective on concerns of economic growth recovery. “The investment case for India has turned less favourable... We see further earning cuts and limited room for re-rating. We downgrade India to underweight and recommend investors to stay selective,” the bank said in a research report. The report, however, favours export-facing sectors, strong balance sheet companies and thematic alpha trades.
The problem with investment-led sectors taking a hit is that huge capital investments in energy, mining, have got struck in various stages of development. Delay in infrastructure development has led to the challenges for the banking system, where banks are facing rise in delinquency rates and in non-performing loans. Some of the mid-size public sectors banks’ problems have risen to such gravity where it is looking that the net worth may take a bigger knock.
Now the operative question for investors is what to buy in case of sign of bottoming out and where to seek shelter in case the situation were to remain as it is? For the latter case, the stable areas at the moment are information technology stocks, along with consumption-led sectors such as FMCG and pharmaceuticals.