Reading the market trends with indices
The NSE Index division publishes the index dashboard each month with a series of in-depth analytics. These analytics not only capture index returns over the last one year and longer time periods, but also other parameters like risk, correlation, and valuations. This gives a quick view of pure returns, risk-adjusted returns and if the sector adds value in diversifying risk of the portfolio. Broadly, we shall look at three classes of indices on these parameters. We shall first look at the generic indices. However, due to the plethora of generic indices, we shall focus only on 4 generic indices viz., Nifty 50, Nifty Next 50, Mid-Cap 100 and the Small Cap 100. Subsequently, we will look at the sectoral and thematic indices too.
What generic indices told us in March 2023
Here is a quick take on the four generic Nifty indices and how they panned out in terms of returns, risk, correlations, and valuation metrics.
- The benchmark Nifty 50 was flat, delivering 0.59% returns over a one year period. However, the Nifty-50 CAGR returns were more impressive at 27.8% for 3 years and 12.75% for a 5-year period. Nifty had relatively low volatility of just 14.7% over the last one year. At a P/E of 20.44X and dividend yield of 1.44%, the Nifty 50 looks in the middle range of its historic valuations.
- The Nifty Next 50 gave negative returns of -7.34% over a one year period. However, the Nifty Next 50 CAGR returns were more impressive at 22.44% for 3 years but just 6.82% for a 5-year period. Nifty Next 50 had relatively higher volatility of 17.3% over last one year. At a P/E of 25.7X and dividend yield of 1.86%, the Nifty Next 50 also looks in the middle range of historic valuations. Correlation of around 0.82 with the Nifty makes it a limited utility diversifier.
- The Nifty Midcap 100 gave 2.01% over a one year period. However, the CAGR returns of the Nifty Midcap 100 were more impressive at 38.11% for 3 years and 10.92% for a 5-year period. Nifty Midcap 100 had relatively higher volatility of 17.5% over last one year. At a P/E of 21.68X and dividend yield of 1.40%, the Nifty Midcap 100 looks reasonable by historical standards. Correlation of around 0.81 with Nifty makes it a limited utility diversifier.
- The Nifty Smallcap 100 gave negative returns of -12.94% over a one year period. However, the CAGR returns of the Nifty Smallcap 100 were more impressive at 36.99% for 3 years. Nifty Smallcap 100 had relatively higher volatility of 19.4% over the last one year. At a P/E of 16.17X and dividend yield of 1.56%, the Nifty Smallcap 100 looks relatively undervalued. Correlation of 0.76 makes it a reasonable diversifier.
What sectoral indices told us in March 2023?
What are the sectoral stories that really worked and what are the stories that did not work out? Let us first look at the sectoral stories that worked well.
- In terms of 1 year returns, the PSU Bank Index delivered 39.5% while the FMCG index delivered 29.1%. Auto sector also flattered with 17.2% returns in one year. At the bottom of the heap were media at -28%, IT at -19.3% and realty at -16.2%. Ironically, the same IT sector was the star performer over a 5-year period giving 20.5% CAGR returns, despite the pressure of FY23. FMCG and financial services were the other sectors to flatter over a 5-year period.
- What about risk and diversification potential of sectoral indices. PSU banks and metal indices were the most volatile with over 30% volatility. Realty and IT with volatility of over 22% also showed above average risk. The lowest correlation with the Nifty were the pharma, health and the FMCG indices, which offered a good diversification potential with correlation of under 0.70 over last one year.
- Finally, let us turn to valuations. In terms of P/E ratio, PSU banks are still priced at single-digit P/E of 8.47X. Other key indices available cheaper than the Nifty include Banks at 15.56X, Metals at 11.45X and Oil & Gas at 14.23X. Sectors that were more expensive than the Nifty included consumer durables at P/E of 56.9X, FMCG at 41.3X, Pharma at 31.6X, Automobiles at 31X and IT at 25.3X.
What thematic indices told us in March 2023?
What are the thematic stories that worked and what are the stories that did not work?
- In terms of 1 year returns, Defence theme delivered 50.5% returns, SME Emerge Index delivered 32.6% and CPSEs delivered 18.6%. At the bottom of the heap were digital themes at -18.9%, Energy at -10.9% and commodities at -6.1%. Interestingly, SME Emerge was also the star performer over a 5-year period giving 30.7% CAGR returns. In terms of business group themes, Tata group stocks delivered 19% CAGR returns over the last five years, resulting in substantial group value accretion.
- What about risk and diversification potential of sectoral indices. The high returns of defence theme also came with the highest volatility of 24.6%. Other sectors to see high volatility were energy, CPSE and the commodity theme. In terms of the thematic stories, the best performer defence also had a very low correlation of 0.51 with the Nifty while CPSE as a theme also had a low correlation of 0.53, making them good diversification candidates for any equity portfolio.
- Finally, let us turn to valuations. In terms of P/E ratio, CPSE theme is still priced at a single-digit P/E ratio of 7.04X. Other key indices available cheaper than the Nifty include Energy at 12.05X, Commodities at 13.5X and Services at 19.4X. Themes that were more expensive than the Nifty included Consumption at P/E of 37.2X, MNCs at 33.2X, SME Emerge at 43.10X and mobility at 37.9X.
CONTENT SOURCE: NIFTYINDICES