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Detailed Market Overview September 2018

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Present Scenario


Retail investors’ portfolios often don’t reflect the bull run highs

Data as on 29/08/18

Although the market is scaling new peaks every other day, a persistent murmur among retail investors is that their portfolio returns do not mirror the unprecedented rise in the benchmark indices. Retail investors hold 7.1 per cent of shares in the BSE 200 companies and their holding value dropped to $130 billion in June 2018 quarter from $140 billion in December 2017. The anomaly can be attributed to the narrowing depth in terms of trading volume and rising concentration as reflected in the lesser number of stocks participating in the rally.

According to Credit Suisse, the current rally in the Nifty has been the most concentrated performance since 2015 with the top 10 contributing stocks comprising of 218 per cent of the index performance while the bottom 10 took away 95 per cent. The rally is turning out to be more concentrated due to investors’ quality preference amidst lowest global appetite for equity risk since 2011.


The five index heavyweight stocks such as Reliance Industries, HDFC Bank, HDFC, TCS and Infosys have contributed nearly 60 per cent to the Sensex gain of 14.2 per cent so far in 2018. A concentrated rally has added to the woes of mutual fund (MF) managers who were underweight on these stocks. The concentration risk of institutional investors can be gauged from the fact that despite 2,732 traded securities on the BSE, the top 40 stocks held by foreign portfolio investors (FPIs), MFs and LIC account for 74 per cent, 63 per cent and 83 per cent of their respective portfolios in that order. The combined delivery volumes on the BSE and the NSE in August dropped to 33 per cent, the lowest in the past five years according to ETIG database. This was also below the five-year average delivery volume of 40.4 per cent. The low delivery percentage reflects waning interest of investors who buy and hold for a long-time. It also suggests that the volumes are mainly driven by traders who merely want to make a quick buck.

Although the market is trading at a record high level, the cash turnover on the exchanges has been consistently coming down since January. The average monthly cash turnover in August was 15 per cent lower than the January level of Rs 42,608 crore. Even the participation from the institutional investors has been quite muted. Foreign portfolio investors and domestic mutual fund participation in the total turnover in August was 14.1 per cent and 5.9 per cent compared with an average of 17 per cent and 9.3 per cent, respectively, a year ago. With no significant investment triggers in the near-term, FPIs either are deploying fresh money in existing stocks or exiting from several counters due to elevated valuations. FPIs have been net sellers worth $550 million in Indian equities so far in 2018.

Why your mutual fund earned you less than Nifty in this recent market rally

Data as on 05/09/18


A handful of index stocks might have anchored the recent market rally, but they are still not on top of the minds of big mutual funds and foreign portfolio investors. The institutional categories are still light on these shares as their weightage in their combined portfolios remains low compared with the clout they enjoy in broader market indices such as MSCI India, BSE200 and Nifty50.

Data showed Reliance Industries, which recently became the first listed company to claim a m-cap of Rs 8,00,000 crore or above, had a 5.7 per cent weightage in FPIs’ total equity exposure in India as of June 30.

In comparison, the stock had 10.6 per cent weight in MSCI India index, 8.7 per cent in Nifty50 and 6.8 per cent in the BSE200 index. In mutual fund portfolios, the RIL scrip accounted for 2.5 per cent of total equity holding, shows a study by Kotak Institutional Equities. Infosys, India’s second largest IT firm, accounts for 4 per cent of FPIs’ equity investments in India. The stock enjoys 6.8 per cent weightage in BSE200 index and 7.2 per cent in MSCI India index. FPI holding in TCS rose in last four quarters to 4.1 per cent (as of June 30) of their total equity holding. MF holding in the stock has risen to 1.8 per cent of their total India portfolio. But that still lags 5.6 per cent weightage the stock has in MSCI India, 4.5 per cent in Nifty50 and 3.4 per cent in the BSE200 indices. Kotak Mahindra Bank and Hindustan Unilever have similar stories.This aberration was observed at a time when only 17 stocks from the Nifty50 pack and eight from the Sensex pack have outperformed the benchmark index in last one year.

The more the number of stocks in an index, the weaker is its performance. This, the Kotak Institutional Equities note suggests, is antithesis of investment management, which says portfolio diversification is a must to reduce risks. “The lopsided performance of the benchmark indices over the past 12 months supported by a handful of stocks and low overall positions of FPIs and MFs on these counters would suggest most actively managed funds would have trailed the market indices in performance,” it said. This may be a good wake-up call for the industry to review the relevance of the benchmarks in achieving financial security objectives of households/retail investors, the Kotak report said. Data suggests largecap mutual funds have generated 14 per cent returns in last one year compared with a 21 per cent rise in the BSE Sensex. Multicap funds, on an average, generated 10 per cent.

What’s driving heavyweights?

The strong performance of most of the outperforming stocks reflects the market’s changed view on them, led by weak macros (IT, pharmaceuticals) and narratives (consumption stocks, RIL), the brokerage said. “The performance of the Indian market in local currency terms has been supported largely by the strong performance of IT stocks, which in turn have performed as a result of the deterioration in macros and the resultant sharp depreciation in the rupee,” the brokerage said. The BSE Sensex is up 12 per cent so far in 2018, but a mere 0.12 per cent in dollar terms.

A deeper look into the stock market rally and why you shouldn’t get carried away by it

Data as on 27/08/18

The benchmark indices are at or near lifetime highs, but the market is polarised and very few stocks are contributing to the gains.

Wide difference in returns within the indices. The huge uptick masks the polarisation within large-cap indices.

Several Nifty companies are still trading below the 200-day moving average. These stocks are not taking part in the Nifty’s upward march.

Wide difference in returns also seen between large-caps and mid-caps. Polarisation in share performance is visible in the two segments.

Only five stocks have contributed a chunk of the gains. Rally in large-caps has been lopsided and lacks real strength.

Scenario Going Forward


Excerpts from an interview of Nilesh Shah, MD, Kotak AMC


What is your view on markets considering all emerging market currencies and economies are going through a patch of adjustment? Will this emerging market slide have impact on portfolio investments in India?
Clearly it is a tricky situation, where one part of India is witnessing dramatic correction. Rupee is down more than 4% in August alone. 10-year interest rate is up about 33 bps in August. On the other hand, equity market in index term is near all-time high. Clearly, from an FII point of view, they will be in two minds – one, should they look at the improving micro situations in India as is evident from the quarterly results or should they worry about deteriorating macro situation where oil prices are higher, rupee has weakened, interest rates have risen and which ultimately could have impact on growth. It is a tricky situation where FIIs hopefully will take a call on a longer-term basis looking at the fundamentals of companies in which they are investing rather than taking a top-down view.

For earnings to recover in a big way, the capex cycle needs to pick up. Do you think this is around the corner or is it going to be another long wait?
There is a slight differentiation. If you look at the IIP series and the GDP growth, capex seems to be recovering. But when we talk with the management in listed segment, we are not seeing significant recovery in capex. Clearly, capex is coming in the non-listed segment, in real estate. Looking at industrial recovery means we are seeing investments in sectors like power where there is surplus capacity. So, it is a little further away. But will there be investment pickup led by the government spending in infrastructure like roads and railways or a pick-up in real estate sector by virtue of rural demand? The answer is yes. We will see one part of investments related to government and rural India doing well but the industrial capex is a little further down the line.

What is the view on mid-caps and small-caps? How do you look at the valuations there now that large-cap valuations are seeming a bit stretched and the overall price points at which mid-caps and small-caps are available?

My feeling is that after the corrections from Jan 2018 level, midcaps have become worth looking at it. But clearly, over next 10 months, we expect markets to be highly volatile. It will be volatility partly because of global factors: a) interest rates in US are rising. B), Liquidity injection across US, Europe and Japan is slowing down. C) A tariff war is raging between US and China and India could see collateral damage. Most important for us, oil prices are on their way up. From $40-60 a barrel, it has gone up to the $70-80 a barrel. All these global factors will have their own impact on Indian market on the way up. Second thing is valuation. Clearly there are some large-caps which are in overvalued category. Finally, the political scenario. In May 2019 general election, if India votes for a stable government committed to reforms and growth, markets will be fine. But if we end up getting a coalition government which is not committed to growth or reform, there will be adverse reaction from the market.

So over next 10 months, there will be enough opportunity for you to invest on a correction. This is not the time to chase the prices. This is not the time to do momentum investment. This is the time to build portfolio on correction.

This article is based on excerpts from the following articles: