A thin rally

The markets are riding piggyback on only a few stocks

The BSE Sensitive Index (Sensex) touched a new high last week but the all-round celebration that typically follows such a milestone was missing this time. That’s because unlike the rally in January this year, the current one is restricted to the large-cap indices, and within that to just a few stocks. While the 30-stock bellwether index is scaling new tops, the 50-stock Nifty is still a per cent away from its high at the beginning of the year. Six stocks — Tata Consultancy Services, Infosys, Hindustan Unilever, Reliance Industries, Housing Development Finance Corporation, and HDFC Bank — account for most of the gains made by the Sensex this year. Nearly two-thirds of the Sensex constituents are in the red or have not managed to beat savings deposit rates. A large number of stocks in the mid- and small-cap spaces are going through a bear market as they are down 20 per cent from their highs.

In the US too, the stock market rally is driven by a few tech stocks, with the rest of the market peaking out in January 2018. Growth worries and the trade war have taken the wind out of the US market, which is creating a ripple effect across the world. Investors there are shunning risk and selling investments in emerging markets, including India. As the US Federal Reserve continues to raise interest rates, there has been a sell-off in bonds as foreign portfolio investors have turned net sellers to the tune of ~426 billion in 2018. Foreigners have sold equities of ~59 billion so far this year, though this exit has been cushioned by the large domestic inflows as retail investors lap up mutual funds. But that cushion is under threat as mutual fund inflows have slowed from May.

The Sensex market capitalisation is up from ~63.6 trillion in January to ~65.2 trillion, while the broad market is down — the market cap of all companies has declined from ~156.6 trillion to ~148 trillion in the same period. The big question is: Where do the markets go from here? The US dollar, global bond yields, crude oil and metals are all higher than what’s good for the Indian markets, and the global trade war is only adding to the uncertainty. While commodity producers and a few exporters will benefit, there will be cost pressure on most industries. For the Nifty50 companies, earnings are expected to grow in double digits on an aggregated basis in the June quarter owing to higher commodity prices and a low base of last year’s as it was the quarter before the goods and services tax (GST) was introduced in July last year. On a price-earnings multiple basis, the Sensex is off its January high of 26 times, but at 23 times — the level it has maintained since April 2017 — it still isn’t cheap. For a large part of the market, especially the smaller companies, the June quarter results may well be the period of reckoning as investors weed out their portfolios of underperformers — thus, the pain in this segment would continue. The new Sensex high, led by a few stocks, suggests that investors are rewarding consistent performance and growth outlook in these firms, making it in that sense a risk-off trade even if valuations are high. Beyond that, the markets will look for a respectable earnings recovery, which has proved elusive for several years.