Nifty rally is being driven by a handful of companies

Great returns on Nifty, but…?

Anybody looking at the Nifty would be impressed by the bounce since March. From a level of 16,945 in March, the Nifty has bounced to 18,826 in June, a return of nearly 11%. By any standards that is an amazing return in a span of less than 3 months for a broad-based index. However, the index movement only reveals part of the story. A handful of stocks have driven most of the returns in the Nifty with majority of stocks either giving negative returns or delivering lacklustre returns to investors. The Nifty movement may sound like music to the investors who were in the right stocks. But, for most others, the Nifty returns would continue to look like a mirage.

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Nifty Returns were concentrated in a handful of stocks

There are currently 50 stocks in the Nifty index, but what is surprising is that just 9 out of these 50 stocks have delivered 50% of the Nifty rally in the last 3 months. For example, if you look at the 1800 points rally in the Nifty since the lows of March 2023, nearly 920 points rally was accounted for by just 9 stocks. That is when the skewed proportions in the market become apparent. Out of the 50 stocks in the Nifty index, 9 stocks accounted for 51% of the Nifty rally while the other 41 stocks accounted for the balance 49% of the rally. That means stocks have rallied even outside these 9 stocks but the impact has been nowhere close to these heavyweights.

In fact, Nifty concentration is much sharper 

Let us move beyond these 9 stocks. Out of the 1,800 points rally in the Nifty since the lows of March 2023, just 4 companies viz. Reliance Industries, ITC, ICICI Bank and Bajaj Finance accounted for 653 points rally. That means 36% of the Nifty rally since March has been driven by just these four stocks and the other 46 stocks accounted for just 64% of the Nifty rally. In any rally, some favourites are likely to outperform, but this time around the outperformance by a handful of stocks has been just too stark. What has led to such a dichotomy in performance. You can attribute that to FPI action. The rally has been the most visible in stock that FPIs have favoured.

Yes, it was the story of what FPIs preferred

If you look at the handful of stocks that have outperformed the other stocks in the index, it has been about FPI preference. For instance, Reliance Industries has been the preferred stock for FPIs due to its sum-of-parts story and the likely value discovery from the listing of Jio Financials. Similarly, ICICI Bank saw a lot of FPI enthusiasm after it reported record levels of net interest margins (NIMs) in the fourth quarter of FY23 at 4.90%. ITC has been the big star of 2023 with the stock gaining more than 100% since the rally started last year. Apart from stability in the core cigarette business, ITC has been showing some genuine traction in the non-cigarette FMCG business. Of course, Bajaj Finance has been the stock that has been attracting a lot of interest after the bank rally topped out.

Which stocks came under pressure in this period. IT stocks led by Infosys and Tech Mahindra saw some selling pressure from FPIs. Even in a month like May 2023, when FPIs infused $5.3 billion, they have been net sellers in IT stocks. Concerns over tech spending, pricing power and the impact of AI has made FPIs quite sceptical about IT stocks in the short to medium term. So, it is a liquidity rally led by risk-on flows into emerging markets like India. Can these flows sustain with India trading at 20 times FY24 forward earnings? That is something we have to wait and watch!

Content source: Financial Express