Slowdown raises question on index movements

The indices of the Indian stock exchanges, which have been surging in the recent past, do not actually denote the real picture of the economy. The analysts tracking the market are apprehensive of this irrational exuberance. Nifty 50, the country's key benchmark barometer, is used by investors to tap the economic growth via the movement of this index.

Last week, Bombay Stock Exchange announced the recomposition of the 30-share Sensex -- dropping under-performing YES Bank, Tata Motors and Vedanta. On the contrary, it included stocks like Titan, who have been out-performers last year.

"But it seems there is a lot of disconnect to reality, as even after GDP growth dropping to a six-year low, the benchmark indices are at lifetime highs because of momentum in selective heavyweight contributors in the index which is overly represented," an analyst on Dalal Street says.

Similarly, only a few companies are appreciating while many stocks in the portfolio are quoting at multiple-year lows while the key index is heading northward.

On the year to date basis, the Nifty-50 is up by 11% as it moved from 10,862 to 12,056 while Bank Nifty is up by 17.62% from 27,160 to 31,946 levels while Nifty Financial is up by 22.64%. However, these indices don’t denote the erosion of wealth seen by the markets this year in the mid-cap and the small-cap stocks.

Take, for instance, Nifty Auto is down by 12.45%, Nifty Mid Cap 50 is down by 4.22%, Nifty small-cap 100 is down by 9.84%, Nifty Metal is down by 16.77%, Nifty Media is down by 28.50%.

On the other hand, the gains in the markets have been cornered towards a few companies on Nifty-50. At the time when the shadow banking has witnessed the bloodbath, investors are shoring up their monies with Bajaj Finance, which is up by 54.03%, and HDFC Ltd, which is up 16.71%. Similarly, HDFC Bank is up by 20.18%, ICICI Bank is up by 42.33%, Reliance is up by 38.34%. This one-tenth of stocks contribute to most of the gains by the Nifty this year.

“Nifty has made new lifetime high at 12,158 by surpassing the previous high of 12,103 but the overall portfolio of many retail clients doesn’t reflect the same as only a few heavyweights are moving up which are having more weight in index comparatively. This raises the question of how to use the index to understand the market sentiment or to know whether the Indian market is moving upwards or downwards,” says Chandan Taparia of Motilal Oswal.

Many analysts believe that banking and financial companies are over-represented on the Nifty, accounting for 39% of the weight. On the contrary, entire telecom, infra, auto, media accounts for only 15% weight. “Stocks which are not performing are getting out from the index weight and only outperformers are being included which also helps index to get more positive bias rather than showing an actual market picture,” says Taparia.