Even as the Nifty 50 plunges hit a fresh 5 month-low giving up the crucial 11,000-mark, an index made excluding the top 10 stocks or Nifty 40 has performed much worse and would hover around the 9,000-mark, according to a study. According to Edelweiss, the top 10 stocks could turn the Nifty 40 way, leading to market cap erosion. While the top 10 companies by market-cap have gained around 21.4% since January 2018, the remaining 40 have seen market-cap coming down by 14.6%, a study by Edelweiss revealed. “The top 10 Nifty firms have not changed much in the last 18 months. What has changed is their correlation with the remaining 40 stocks,” Edelweiss said in a report. 

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Explaining this shift in correlation, Edelweiss said that the Nifty 50 components had moved in sync till the first half of calendar year 2018, but then there was a divergence in performance since then. “An index created by the Nifty next 40 is currently at 9,000, while the Nifty is trading neat the 11,000-mark,” Edelweiss said. The deviation is much wider if we take into account Nifty Midcap and Nifty Smallcap indices. Notably, while the Nifty has erased gains for the year, and is down about 0.5% since January, the Nifty Midcap Index has lost nearly 30% while the Nifty Smallcap index has corrected by over 40 per cent. The under performance started after the announcement of LTCG tax on equities announced in Budget-2018, which has not stabilised till dated, noted the firm.

Interestingly, the largecap stocks were still holding on, but the introduction on super rich tax in the latest Budget has dampened investor sentiment, leading to a viscous sell-off by FII investors. Edeweiss study found that while FPI’s have sold a whopping $ 2.5 billion in July, the domestic investors have out in $2.4 billion. The Sensex registered its worst July in 17 years. The Sensex dropped 4.9% in the month hurt by disappointment with the country’s new budget, muted corporate earnings and the ongoing credit crunch.

The benchmark index has performed better in August than July in only five years since 2002, data compiled by Bloomberg show. While the top 10 have managed to be resilient, Edelweiss noted that the correlation between top 10 stocks could converge with the rest 40. “The theory of mean reversion suggest a reverse in the deviation, but looks like the top 10 will converge with the rest 40 rather that top 40 moving with top 10,” said the firm.