Why Sensex is at record high, but your portfolio doesnt feel like it
On the Nifty, the top 10 largest stocks by market cap have outperformed the Nifty Index in 2018. The rally was mostly driven by Reliance Industries, Tata Consultancy Services (TCS), Infosys, HDFC Bank and HDFC.
Benchmark Sensex is trading near its record high, however, the broader market has not been participating in the rally witnessed in last few weeks. Notably, according to a UBS Securities report, of all listed stocks, 60 per cent are down at least 20 per cent so far this year!
Sensex is up 7 per cent on a year to date basis. In contrast, the BSE Midcap index is down 15 per cent YTD.
On the Nifty, the top 10 largest stocks by market cap have outperformed the Nifty Index in 2018. The rally was mostly driven by Reliance Industries, Tata Consultancy Services (TCS), Infosys, HDFC Bank and HDFC.
FIIs have net sold $0.8 billion of Indian equities YTD and domestic mutual funds have seen net inflow of $10 billion. Within the Nifty, the top-10 stocks by market cap are up nearly 20 per cent in 2018, while SMID (small and mid-cap) indices are down 16-23 per cent YTD but inflow into SMID schemes of mutual funds remains positive.
In the given scenario, Gautam Chhaochharia and Sanjena Dadawala, analysts, UBS Securities India are underweight on small and midcap space.
"Our analysis suggests similar trends historically in periods of sharp currency depreciation. UBS Economist Tanvee Gupta Jain expects the rupee to remain in a range of 68-72 against the USD. We reiterate our view of unattractive risk-reward for the Nifty and our underweight on SMIDs," they said in a research note.
The analysts explained that SMIDs have underperformed large caps mostly during phases of currency weakness.
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"We recently reiterated our underweight on SMIDs for 2018 in an environment of rising rates and moderating flow. Inflow into local equity mutual funds remains positive but started slowing in Q1 2018; inflow in Q2 did not slow further. Our analysis suggests SMID schemes have not seen outflow yet. However, Portfolio Management Services (PMS) schemes, where high-net-worth individuals are the investors, have started to see outflow.
However, despite the correction in SMIDs, their valuation premium to the Nifty is being sustained above the peaks of 2007-08.
"Historically, during periods of divergent performance, the underperforming index has usually caught up only when currency has reversed," they added.
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