Nifty’s July 2018 rally: Is all well?

The 50-stock index hit an all-time record high as it clocked in at 11,200 on Friday 27th July. With 54 percent of the index trading above its 200-day moving average, it’s a worth dissecting this movement before we all proceed to cut the cake.

Time to celebrate?

The movement over the last few months begs one to search a little deeper into last weeks all-time high. The last time such a portion of the Nifty was driving the rally to a peak was ominously January 2008, when 52 percent of the constituents traded above the technical level.

Furthermore, data shows that over the past few years, such an upward movement has pulled the mid-cap and small-caps as well, however this reassurance is missing in the recent rally, with BSE MidCap and BSE SmallCap indices losing at 9.27% and 12.36%[1], in the past six months, whereas Sensex added 4.05% in the same duration.

FANG in India

As for other similarities, experts are beginning to draw a parallel to this movement to the rally driven by FANG (Facebook, Amazon, Netflix and Google [Alphabet]) stocks in the US. Just as the recent decline of Facebook’s stock by 20%, the recent rally poses a threat brought about by the major drivers for the overall market.

So who’s to blame and who’s to thank?[2]

ITC; The FMCG major itself contributed a rise of more than 125 points on the BSE Sensex in the morning trade on Friday 27th July. The scrip rallied more than 5 per cent post its reassuring Q1 earnings.

The company on Thursday reported 10 per cent increase in standalone net profit at Rs 2,818.68 crore for the first quarter ended June, compared to a standalone net profit of Rs 2,560.50 crore in the first quarter last fiscal. This rise is supported by lower expenses, good growth in agri-business and other FMCG business despite a decline in it’s cigarettes sales.

Robust buying in oil-to-telecom titan Reliance Industries and private lender ICICI Bank further reinforced the 50-share index. RIL, HDFC Ltd. And ITC, which make up 3 out of the 4 heaviest weighted stocks of the index (in itself accounting for over 20% of the index), all outperformed the market, and strained the rally. One cannot deny the rise in other stocks to propel this growth with ICICI Bank posting a rise in net profit, however what is alarming is that 18 stocks of the BSE barometer were trading lower, down by over 10%.

Although TCS and Hindustan Unilever, served as the heavyweights that would average out this spurt, the market still saw a leap. UBS Securities India outlined, such outperformance of stocks is seen during currency weakness and risk aversion.

Nifty’s Top Point Contributors[3]

Name Point Contribution
HDFC Bank 121
Reliance Industries 88
HDFC 85
Infosys 65
ITC 64

 

Nifty’s constituents by Weight: https://stocksandsecurities.adityabirlacapital.com/equity/nifty-weightage

BSE Sensex’s constituents by Weight: https://stocksandsecurities.adityabirlacapital.com/equity/sensex-weightage

 

Other Factors:

FII comfort: Data showed that foreign institutional investors made sizeable buying on Thursday, which further supported sentiment. Foreign portfolio investors (FPIs) bought shares worth a net of Rs 2,453.57 crore.

Investor Optimism: There is an overall positive sentiment with corporate earnings for the June quarter boosting investors confidence. Bullishness in the stock is further highlighted in the huge put selling witnessed on the derivatives counter Friday pre-results. This is derived from a revival in earnings growth, prospects of a good monsoon, and quiet on further global trade barriers.

What Next?

Overall, the markets are likely to remain volatile over the next few months amid global conflicts over trade, as well as a tightening on excessive liquidity which has affected the global markets. We may see a slight correction on stock driven rally, but investor sentiments are likely to be governed by the prediction of the outcome of next years’ election.

This article is penned by Siddhant Shah, Moneybee Investment Advisors Private Limited.

[1] ‘Mint’ (2018) Article  – ‘Sensex, Nifty at new highs, but why is the current market rally so different’, Newspaper (31 July 2018)

[2]Economic Times (2018) Web Article – Link //economictimes.indiatimes.com/articleshow/65160890.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

[3] Bloomberg Quint (2018) Web Article – ‘Nifty’s Rally To Record Has An Eerie Similarity With 2008-Peak’ (Since 23 March 2018)

 

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