Narrow rally fails to cheer retail investors

Though both Sensex and Nifty are at record highs, most retail investors are feeling left out as a large number of stocks have not participated in this rally. Rex Mathew explains why

Helped by strong inflows from overseas investors, domestic stock market indices have surged ahead over the last few months and are setting new lifetime highs almost every day. Strong economic growth, expected to exceed 8.5 per cent for the current financial year, would sustain the excellent corporate performance next year as well.

The Sensex took just 26 trading sessions to move from 13000 to 14000 and the Nifty has conquered 4000. Sensex has gained nearly 6 per cent over the last one month, mostly led by banking, capital goods and technology stocks. Among the sectoral indices on the BSE, the bank index has been the best performer with gains of close to 10 per cent over the last one month or so. BSE capital goods and BSE IT indices also did well during this period.

SBI was the best performer in the rally from 13000 to 14000, with gains of over 20 per cent. Telecom stocks Bharti and Reliance Communications gained between 16 and 18 per cent each. Cement stocks also had a good time as ACC rallied almost 19 per cent and Gujarat Ambuja gained over 9 per cent.

Total market capitalisation of all listed Indian companies now stands at a staggering Rs36.4 lakh crore, higher than last financial year's GDP of Rs32 lakh crore at current prices.

With a market capitalisation of around $820 billion, India now ranks fourth among the largest stock markets in the Asia-Pacific region. Japan leads the region with a market cap of over $4 trillion, followed by Hong Kong and Australia. India is followed by South Korea at the fifth position. With some high profile IPO's like DLF, Cairn India and Idea Cellular — which would have a combined market value in excess of $30 billion — in the pipeline, India would extend its lead in market cap over South Korea by early next year.

Among major global markets, India has been only the 4th best performing market over the last month and the worst among the BRIC (Brazil, Russia, India and China) economies. Shanghai has been the best performer with returns in excess of 16 per cent followed by Russia, which gained nearly 9 per cent. Brazil gained nearly 8 per cent during this period.

However, a large section of retail investors have not benefited from this rally. The up move has been very selective and has bypassed many stocks, especially in the mid-cap and small-cap spaces. Retail investors are still stuck in positions built before the May 2006 slump.

Mid-caps lag
Mid-caps are yet to regain the heights scaled in May this year and many stocks continue to trade with significant discounts from the levels seen earlier this year. The CNX Mid-cap Index is still around 200 points below its lifetime high of 5350 touched in May 2006. A large number of the 100 stocks, which form this index, are still trading below their May levels.

The BSE Mid-cap index has gained only around 4 per cent over the last one month and is more than 300 points below its lifetime high. On the BSE Mid-cap Index, more than 60 per cent of the stocks, which are part of the index, are trading below their May levels and only about 25 per cent have given decent returns in excess of 10 per cent.

The situation is even worse in the small cap space. The BSE Small-cap index has gained only about 3 per cent in the last one month and is more than 1,100 points, or nearly 14 per cent, below its lifetime high set in May 2006. More than 70 per cent of the stocks forming the BSE Small-cap index are trading below their May levels and only about 15 per cent have given returns of more than 10 per cent in this period.

The reasons for this underperformance are pretty simple and straightforward. Excellent performance by the larger companies has led to a shift in investor interest away from mid-caps and small-caps in recent months. Some of the mid-caps have failed to deliver and foreign investors have lost heavily in a few of them. When the large caps offer such excellent growth at far lower risk levels, it is only natural that investors started focussing on large caps.

Among the mid-caps, those who have performed well are stocks of companies who have very ambitious plans and those who have the potential to grow much larger. Some of the real estate plays, construction companies and financial services companies are examples. Stocks of select companies, which are in virgin markets have also benefited considerably.

This situation may change once the large caps seek higher valuations, which may make some investors uncomfortable. There are a large number of companies in the mid-cap and small-cap universe, which have the potential to deliver excellent growth rates over the next many years and emerge as globally competitive entities. Such ideas would definitely attract a lot of investor interest as always.

More importantly, this bull run is not a result of any 'irrational exuberance' — the term coined by former US Fed chairman Alan Greenspan nearly a decade ago to warn against the excesses of the last technology-led rally. This up trend is backed by strong corporate performance, which looks sustainable over a longer term, though there are select pockets where some froth is building up.

Bulging billion-dollar club
The number of companies, which enjoy market valuations in excess of a billion dollars continues to increase. Five companies, Reliance Petroleum, Tech Mahindra, GMR Infrastructure, Parsvnath and Lanco, which have come out with new issues over the last six months have joined the club, taking the total to 131.

Banks dominate the billionaires' club followed by technology services. The country's emergence as a very competitive manufacturer of generic drugs has resulted in as many as eight pharma companies enjoying valuations of a billion dollar or more. The frenzy in the real estate sector has lifted an equal number of property stocks to the billion-dollar club.

Though companies in the oil and gas space occupy top spots in individual valuations, only six companies from the sector are included in the league of billionaires. Six companies from the auto space, both 4-wheelers and 2-wheelers, appear in the list. As four of the larger telecom companies — BSNL, Hutch, Idea and Tata Tele — are as yet unlisted, only four telecom service providers find themselves in the list.

Reliance Industries captured the 'most valuable' company crown from ONGC for a brief period, but the PSU oil behemoth easily won it back with ease. ONGC now commands a market value of Rs183,333 crore or $41.2 billion, which is still nearly $6 billion short of its peak value touched in May this year. Reliance Industries follows with a market cap of $40.01 billion.

Infosys and NTPC are fighting it out for the third place. As of yesterday, Infosys has a modest lead with a market cap of $27.96 billion while NTPC comes in 4th with a market cap of $27.73 billion. Bharti Airtel has seen a spectacular rally over the last 6 months and is 5th on the list with a market
value of $27.21 billion.

TCS has also done well to lift its market value to $26.14 billion, the last one with a market cap of over Rs1 lakh crore, and occupies the 6th slot. Reliance Communications, Wipro Limited, ICICI Bank and ITC complete the top-10 in terms of market capitalisation.