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Sunday, June 28, 2009

The Sensex has moved up much faster than Nifty

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The Sensex has moved up much faster than Nifty in the current rally for the first time in last six years. Investors should better be watchful...

SINCE the start of the bull run early this decade, there have been many rallies. This sounds more like a restatement of the obvious, but a bull run is nothing but a combination of several rallies happening over the course of long period of time. That bull-run came to a halt in January 2008.
    Since March 09, 2009 the bear market saw a rally, which caught everyone by surprise. An aspect of this rally has virtually gone unnoticed. In no other rally dating back to 2003 that the performance of Nifty and Sensex had diverged so much. Consider this: Sensex is up 81% since March 09 and Nifty is up 70%. The difference is of eleven percentage points. Let us compare this with earlier rallies. The first rally of the previous bull-run started on May 12, 2003 and went on unabated till January 13, 2004. In that time period, Sensex had gone up by 108%, while the Nifty was up by 110% implying a difference of just 200 basis points. It must be noted that the rally in 2003-04, was much stronger, yet the divergence in two indices was much lesser compared to current rally.
    In a similar way, in the next rally, which started on May 17, 2004 and lasted till January 7, 2005,
Nifty had gone up by 45%, while Sensex climbed up 43% - translating into a difference of again 200 basis points. The case wasn't much different in many other rallies, which followed.
    One obvious reason for divergence between Sensex & Nifty is that while the former is an index of 30 companies; the latter is constituted of 50. However, both the indices are supposed to be barometers of India Inc's financial performance. And, therefore such a difference can confuse the investors. It might also
show that there is some kind of weakness in the current rally, or in other words, it is not as broad based, as one would expect it to be.
    Well, purely based on this data, we cannot say whether the current rally will continue or not. But,
it can be easily said that Sensex, at best, is a very weak approximation of our economy. So, investors should better be careful! Sample this: mining and quarrying contribute just 2% to India's gross domestic product (GDP) but mining companies account for 11% of the total market capitalization of 30 Sensex companies. Financing, business and services contribute 15% to country's GDP, while its contribution to market-cap of Sensex companies is 25%. This clearly establishes that what is bad for economy may not be bad for Sensex and what is good for economy may not be good for Sensex. This has precedence in recent times. Corporate India was in the pink of its health in the first half of FY 2009, when Sensex had corrected by 38% on September 30, 2008 (end of first half of FY 2009) since January 2008. When the markets started rising in March this year, there was no reason to cheer for Indian companies as most of them saw their top and bottom line growth falling in third quarter of FY 2009 and they expected little or no improvement in the fourth and the last quarter of the fiscal. In terms of representing economy, Nifty is no better than Sensex. This is because the sectoral composition of Nifty is almost same as that of Sensex. So, Nifty can be more broad-based, but it too fails to be a good proxy for economy. Another reason of such lopsidedness in Sensex and Nifty's performance is that the top 20 companies of India contribute to almost 50% of the total market capitalization. So, any rally in the prices of these 20 companies will reflect in indices. In view of such asymmetry between two indices and between the performance of economy and indices, the investors are advised to keep a sharp eye on the developments in the real economy and not get swayed away by market movements.
karan.sehgal@timesgroup.com 


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