Why Sensex’s feat has gone largely unnoticed

The Indian benchmark index, S&P BSE Sensex, surpassed the previous closing high recorded in January this year, to close at 36,548 on Thursday. The index is up 7.3 per cent since the beginning of this year and has managed to outdo most of its emerging market peers.

But the Sensex’ feat has gone largely unnoticed. Also, there is absence of celebration in the market.

This can be explained by the fact that the rally in the market has been extremely narrow; limited to the large-caps and that too, from select sectors. The steep decline in the mid- and small-cap stocks forming part of the larger market have left a gaping hole in the portfolios of investors.

Trumping global benchmarks

Global equity markets, especially emerging markets have been witnessing a correction since the beginning of this year.

The trade war started by US President Donald Trump, coupled with fund outflows due to the US Federal Reserve tightening, have resulted in indices in countries such as Indonesia, Malaysia, South Korea, and Thailand losing between 5 and 7 per cent since the beginning of 2018.

The Chinese benchmark has been the worst-hit, down 14 per cent. Increase in prices of crude has however, helped the Russian and Saudi Arabian benchmarks record sturdy gains.

The outperformance of the Sensex, with YTD gains of 7 per cent, therefore, appears a trifle weird, since India is also witnessing FPI outflows and the Indian economy is impacted by rising crude oil prices and a weakening rupee.

One reason for the outperformance of the Sensex is the copious inflows from domestic mutual funds that has been providing support to large-cap stocks. But besides this, a look at the gainers in the Sensex shows that it is premature to begin exulting about the Sensex’ rally.

Too narrow for comfort

While the Sensex is moving higher, the BSE Midcap Index is down 13 per cent YTD and the BSE Smallcap Index is down a sharper 15 per cent. Among the sectoral indices too, all the sectors including healthcare, auto, oil and gas, consumer durables, power, metals and realty are sporting losses. Only the IT (28 per cent gain), FMCG (8.6 per cent) and banking (4 per cent) are in the green.

It is obvious that the IT sector, helped by a weak rupee and improving business prospects of the larger players due to revival in key markets, has largely led the Sensex higher.

The top gainer in the Sensex is TCS that has gained 46 per cent since the beginning of this year, followed by Kotak Mahindra Bank, Hindustan Unilever, M&M and Reliance Industries.

The Sensex has also been aided by the fact that stocks that have high weightage in the index, if the free-float market-cap is considered, have fared relatively better. HDFC Bank, for instance, which has the top weight, using this metric has moved 15 per cent higher this calendar. Reliance Industries’ 17 per cent rise has also helped the index since it has the next highest weight in the Sensex.

Market participants, however, appear to be exercising caution ahead of the upcoming State elections and the Lok Sabha elections in 2019. Higher crude oil prices, rising interest costs and the stressed banking sector are other worries plaguing Indian investors.

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