On June 3, equity markets were celebrating life-highs on the S&P BSE Sensex and National Stock Exchange’s (NSE) Nifty 50, which closed at 40,267.62 and 12,088.55 respectively. But these broad benchmarks which consist of 30 and 50 stocks each do not represent India Inc in totality.

At the close of trade on August 2, at 37,118.22 and 10,997.35 respectively, Sensex and Nifty 50 have shed over 3,149 and 1,091 points respectively to register a decline of 7.82% and 9.03% from June 3’s life-high close.

That larger indices do not show the true picture is also validated by comparing the S&P BSE MidCap and SmallCap indices that were trading 10.49% and 13.82% below their 52-week high on June 3. And, that is not the entire picture of the skewed nature of equity markets, or more particularly Sensex and Nifty 50.

In a July 31 note from Edelweiss Securities, analysts Yogesh Radke, Sriram Velayudhan, and Abhilash Pagaria, segregated the top 10 heavy-weighted stocks from the Nifty 50, and asked and answered an interesting question: “How does Nifty 40 look like? Nifty 50 @ 11,000 vs Nifty 40 @ 9,000.” The top 10 heavy-weighted stocks of Nifty have not changed much in the past one and half years. What has changed is their correlation with the rest of the 40 names. “Since Jan-18, the top 10 market capitalisation companies have gained nearly 21.4% whereas the rest 40 companies’ market capitalisation is down by nearly 14.6%,”the trio highlights.

The Edelweiss trio also explain that since Jan-18, Nifty 50 is still in the green with a 6% return but MidCap is down by 26% and SmallCap by 39%. “The underperformance of Mid and Small Cap started post the announcement of introduction of long-term capital gain (LTCG) tax in the February 2018 budget which has till date not stabilised,” they add.

On the other hand the large caps were holding on just before the announcement of introduction of super rich tax in the July 2019 budget after which they too have witnessed sell-offs. “The fall has been majorly driven by the foreign portfolio investor (FPI) outflows which saw sell-off to the tune of $2.5 billion last month. “Theory of mean revision suggests a reverse of the deviation but looks like the top 10 to converge with the rest 40 rather than the rest 40 moving to the top 10,”the trio warns.

And the market seems to be witnessing the same too, as the week ended August 2 has been the worst week for key indices since May 2012. From the close of July 26, Sensex and Nifty 50 respectively lost over 764 points (-2.02%) and 286 points (-2.54%) each. The S&P BSE MidCap and SmallCap shed over 309 points (-2.32%) and 563 points (-4.31%) in the same period.

“Commentary of the US Federal Reserve on the future rate cut, weak underlying trends in quarterly results, slump in automobile sales dented investor sentiments,” says Sanjeev Zarbade, vice president of private client group research at Kotak Securities. “Markets would continue to move depending upon the earnings announcements, macro-economic data (inflation and IIP) and global cues,” Zarbade adds. “Weak crude price is a positive.”

On August 2, according to Ajit Mishra, vice president-research, Religare Broking, the bias was negative in the first hour of the trade but gradual rebound in select heavy weights not only pared losses but also helped the benchmark index to end in green. From the previous day close of 37,018.32 and 10,980, Sensex and Nifty 50 saw a decline of over 410 points (-1.11%) and 131 points (-1.19%) each to touch the day’s low of 36,607.41 and 10,848.95, respectively. “We are seeing possibility of rebound in Nifty 50 but sustainability at the higher levels seems difficult,” says Mishra.

The worst hits were the S&P BSE MidCap and SmallCap, which touched their 52-week low on August 2, at 13,335.7 and 12,350.7 each. At these points, the respective indices fell over 190 points (-1.41%) and 201 points (-1.6%) compared to their previous day closings.

According to Arun Thukral, MD and CEO of Mumbai-based Axis Securities, the recent correction has been driven by various factors, viz. the global weakness, selling by FPIs along with signs of a slowdown in the domestic economy. “Having breached the psychologically crucial levels, the markets are expected to be volatile in the near term,” says Thukral. “A large part of the market is currently trading at valuations which were not seen in past two-three years probably factoring in no-growth or de-growth for long which looks to be unlikely though near term concerns persist,” Thukral adds.

Market experts suggest that it is time to go defensive. “Active investors seeking higher returns must allocate a good chunk of their portfolio approximately 30% to gold and lower their equity weightage in order to sail through these testing times,” says Jimeet Modi, founder and CEO, SAMCO Securities. “Local woes were at its peak but now even global factors have started to exert negative pressure on the market,” Modi adds. Dow Jones has begun its downward descent from its lifetime highs despite the U.S. Federal Reserve reducing interest rates by 0.25% with a dovish outlook. “All is not well with global equities as an asset class but gold can be a defensive play given that a reversal in interest rate cycle has begun,” Modi says in support of his view on gold.

All eyes are now glued to the Reserve Bank of India’s (RBI) policy meeting scheduled on August 7. “Since the last policy meeting high frequency indicators have signalled a sharper decline in activity which will weigh on the policy meet discussions,” says Suvodeep Rakshit, vice president & senior economist at Kotak Institutional Equities. Rakshit is of the view that the RBI could reduce the repo rate by 0.25% (25 basis points) to 5.5% on August 7. “On the global front, growth remains under pressure and global central banks indicating easier monetary policy, US-China trade war continues to simmer, Brexit-related uncertainty remains high, and crude prices outlook remains benign,” Rakshit adds.

While the markets are choppy, SAMCO Securities’ Modi advises that “it is not the time for bottom fishing and all rallies should be taken as an opportunity to raise cash in the portfolio levels.” Also, it is extremely difficult to identify bottoms when there is liquidity crisis. “The very same analogy was observed in the 2009 crash due to the subprime crises,” Modi adds.

Clearly, the pain is far from over for equity investors who should look beyond the heavy-weights-driven Sensex and Nifty which are sort of misleading.

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