Don’t be fooled by the Sensex’s new highs
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While the Sensex has been busy hitting new highs every other trading session, the rest of the market is quietly but surely correcting. Since 16 May, when the BSE All-cap index peaked, nearly three-fourths of all stocks traded on BSE have fallen in value, and about half of all stocks have fallen by over 5%. The S&P BSE Sensex has risen nearly 2.3% during this period.
And as chart 1 alongside shows, the only category of stocks that has risen during this period is the one with extremely high market capitalization, or stocks with a valuation of over Rs1 trillion. Each of the other categories has seen a decrease in value, with the rate of decline being inversely proportional to the size of stocks in the category. This is hardly surprising; typically, small- and mid-cap stocks fall at a faster pace when markets correct.
The ultra large cap universe appears to be holding up, thanks to portfolio flows—a large part of which typically ends up in this category of stocks. Besides, with signs of an imminent correction, some portfolio investors may prefer investments in stocks with high liquidity, which may offer an easier exit. It’s worthwhile noting here that flows from foreign portfolio investors have amounted to more than $850 million in the past two weeks, and mutual funds flows remain strong.
The correction was more severe in some categories between 16 and 24 May, and there has been a marginal recovery in the past seven trading sessions.
It’s interesting to also note that within the top category, if we leave out some outliers such as ITC Ltd, Tata Consultancy Services Ltd, HDFC Bank Ltd and Hindustan Unilever Ltd, there is a decline of over 1%. As such, even here, portfolio investors are sticking with defensives in the information technology services and fast-moving consumer goods sectors, apart from private banks such as HDFC Bank and ICICI Bank. As chart 2 shows, most other large sectors such as energy, pharmaceuticals and metals and mining have seen a correction.