Why are retail investors not excited with the Sensex rally ??
The caption couldn’t be more confounding , yet aptly reflects the dismal dichotomy in the street . While Diwali has come early for Sensex , festive cheers are way too far for the lay investors . Behind the glittering fireworks in Sensex , underlying trends in the broader space are less reassuring and more ominous .
Portfolio flows are a puzzle . Not in a very distant past , couple of months to be exact , nothing seemed to go right for India story . It was all round gloom and doom with Rupee hitting all time lows triggered not less by tapering tantrums . Bleak growth and inflation forecasts added to the slide . Fickle liquidity flows reversed as quickly as possible . Lot has turned since then . With Rajan Effect ( forex swap measures ) taking the sting out of rupee’s speculative rout aided by delayed QE tapering (Quantitative Easing) , sanity has returned to the currency market . This coupled with softening US treasury yield ( on muted economic data points from US) has brought a dramatic turn in FII flows to emerging market assets . India being a high beta market , gushing flows in Oct triggered a sharp rally in Sensex to bring it to a flirting distance to all time high . It should have been a cause for jubilation for retail , yet no such feverish fervor spotted in them . Market is near all time high whereas mood (retail) is barely above all time low . Where is the disconnect ?. Here are some key data points which explains the underlying reasons for this divergence .
- While Sensex is just shy of all time high ( just 2% below peak) , the story for broader market is lackluster with small cap , mid-cap and BSE-500 indices languishing well below their 2008 peak at -58% , -40% and -16% respectively.
- Even within Sensex , the movement is so skewed that one out of every two stocks has been bleeding . According to Capitaline analysis , as many as 14 Sensex stocks fell between 17 and 73% . These include BHEL ( down 73%) , Jindal Steel ( 67% down) , Hindalco ( 53% down) and SBI ( 50% down) to name a few . Barring IT , FMCG and Pharma stocks , rest of the stocks in Sensex have witnessed terrible underperformance.
- Since November 2010 , while Sensex has declined 1.53% , the BSE small cap index and the midcap index have lost 47%+ and 31%+ respectively .
- Further, the old retail favorites like JP Associates , Reliance Infra , DLF and Rcom which were part of the Sensex earlier ( not now) , are now down by 65%+ , 59%+,55%+ and 15%+ respectively resulting in dismal mood for retail investors .
- It is evident from above analysis that the market has been handsomely rewarding FII backed stocks while penalizing the rest of the pack mercilessly . This has created a bubble like situation in handful of FII favored momentum stocks with the rest of the market trading not far from its all time low . As a result of this steep divergence , expensive stocks are turning more expensive and cheaper stocks are turning ultra-cheap.
As we reflect these data points , what is emerging is a weird mix of abundant caution on one part of the market and elevated excitement on the other part ( undervalued space) . If history is any guide , the deep divergence that we see currently is untenable and should regress over time . Such regression is likely to bring much needed cheers to the investors in the broader space ( esp. retail investors) , timing of which is unpredictable though.
Happy Value Investing !!!
ArunaGiri . N