Sparkling Sensex , Sagging Sentiment !!!

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