Festive feasting, wild partying and endless business trips all have one thing in common — the craving for home food (ghar ka khaana) soon after. The humble dal chawal or curd rice helps undo the gut damage suffered previously and restores some sort of balance. 

Similarly in equities, post a wild ride in the broader market (read: mid-caps, small-caps and micro-caps), sanity gets restored when market participants start craving for large-caps to protect their gut (portfolio).

Are we at a similar stage now when the gut needs protection? We dissect.

Patterns are to be respected till the time they stop working. One such pattern that has worked for two decades now is the ratio of the aggregate market capitalisation of Sensex 30 stocks as a percentage of the entire market.

As can be seen from the accompanying chart, the aggregate market capitalisation of the Sensex 30 stocks tends to oscillate between 40 per cent and 50 per cent. This clearly conveys that at 50 per cent, market participants have had ghar ka khaana to the extent where they are bored and now seek some ‘excitement’. Whereas at 40 per cent, it means that market participants have been partying/travelling hard, and it’s now time to get back to home-made food.

At this juncture, the Sensex stocks are exactly at 40 per cent of the overall market, indicating that it’s time for the large-caps to outperform. If this pattern were to play out, what type of stocks must one own? Unlike restaurants, home-made food options aren’t abundant. Therefore. one has to make do with limited choice to keep the gut happy. A point to note here is that the basic assumption being fasting (staying in cash) is not a practical option for most market participants.

There have been three occasions when aggregate market capitalisation of Sensex 30 companies reverted to 50 per cent, resulting in large-cap outperformance and broader market correction.

January 2008 to March 2009 (Period of ~14 months)

November 2010 to September 2013 (Period of ~34 months)

December 2017 to July 2020 (Period of ~31 months)

As can be seen from the accompanying chart above, we’ve had the Sensex outperform the mid and small-cap indices in this said period. Moreover, we have just 9 companies (limited home-made choices) that have managed to beat even the Sensex returns during this period on all three occasions. 

Should we then blindly buy into these companies to outperform the market?

As a consequence of their previous outperformance, 6 out of the 9 names have seen a significant expansion in their multiple (table above) while it has remained the same for 3 companies. 

How the above can be interpreted is best left to the reader. While we stop short of recommending stock names, it looks like the prudent thing to do would be to have allocation towards large-cap private sector banks and IT. More important aspect is to be knowledgeable about the available homemade options to make choices and keep the gut happy

(Abinash Swamenathan has contributed to the article. Authors are part of the research team at NAFA Asset Managers)

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