Jolted by Macro Headwinds, Do Markets Tell A Different Tale?

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From an Indian perspective, the yr to date has been jolted by a number of macro themes which I imagine are notable headwinds for the economic system.

 

First, a hawkish surroundings within the western world characterised by financial tightening is a marked reversal to an elongated interval of quantitative easing and declining rates of interest. Consequently, a textbook “flight to quality” thesis is at play, in impact driving capital outflow from India and different rising markets inducing an actual contagion threat.

 

Second, an uptick in crude oil costs via the yr (crude oil is up 7%+ year-to-date) has pressured fiscal deficits and will pull the handbrakes on the expansion profile of an economic system that depends on abroad provide of crude oil for almost 80% of its demand.

 

The mixed impact of the aforementioned two elements have induced the Third – a swift depreciation within the INR which is down almost 14%+ year-to-date towards the USD.

 

Fourth, escalating US-Sino commerce tensions have definitely taken some shine off the worldwide progress outlook.

 

A deep-dive on these macro themes and others might be discovered on this glorious opinion piece by Nikhil Arora: Current State of the Indian Economy: Is it Time to Go Bearish?

 

However, the home inventory market headlines numbers illustrate a considerably totally different narrative. Nifty 50 and BSE Sensex have seen pretty strong progress year-to-date. Nifty 50 is up round 9% and the BSE Sensex is up round 12%. If one have been to take a look at Nifty 50 via simply the macro-lens, one might simply as simply have anticipated the alternative actions within the markets. An equally palatable consequence one may argue.

 

In that context, one wonders if the power in home headline numbers is certainly a proxy for underlying financial well being?

 

A Look Into The Nifty 50 – “Weights” Matter

 

Nifty 50 is taken into account the flagship index on the National Stock Exchange, monitoring the behaviour of the most important and most liquid blue chip shares. Given its numerous constituents, wholesome liquidity and basic clout, it’s typically handled as a proxy for general financial well being.

 

However, as a result of its float-adjusted market capitalization primarily based indexing methodology, the larger and bigger constituents can meaningfully sway the whole market. While, that is true for all market capitalization primarily based indexing strategies, an in depth take a look at the index constituents makes for an attention-grabbing learn via. This is all of the extra attention-grabbing provided that there are a plethora of macro catalysts concurrently at play within the present surroundings.

 

From a simplistic perspective, increased the load of the inventory within the Nifty 50 index, extra is its directional pull on the index.

 

An instance that demonstrates this pretty nicely is Reliance Industries Limited (RIL). RIL has near 10% weight on the Nifty 50 as a result of its lofty market capitalization. RIL inventory is up round 35% year-to-date, a outstanding surge which might make even a excessive risk-high return kind progress investor pretty content material with the year-to-date return. However, what one may miss simply is the huge say that RIL and its 35% surge has had in shifting the Nifty 50 headline numbers, that are those which can be often reported by the mainstream press anyway.

 

Another instance is a one more heavy ’weight’ – HDFC Bank, additionally constituting almost 10% to the Nifty 50 weight and considerably much like RIL has additionally seen its inventory climb year-to-date. HDFC is up a strong 10% year-to-date and consequently has considerably contributed to Nifty 50’s upward motion.

Source: nseindia.com

Weights are as of Aug 31st market shut 

Reliance Industries Ltd, HDFC Bank, Housing Development Finance Corporation, Infosys Ltd and ITC Ltd collectively accounting for almost 40% of general weight of the Nifty 50 and are all up meaningfully. In reality, all high ten shares by weight on Nifty 50 are all up year-to-date.

 

On traversing down the Nifty 50 constituents, one can rapidly decipher that greater weight shares have usually seen upward actions year-to-date and in flip helped impress the broader Nifty 50. An instance from nearer to the opposite finish of the spectrum is Hindustan Petroleum Corporation Ltd which is down 40% year-to-date making it the worst performer within the Nifty 50 however has lower than 1% weight on the Nifty 50 index. In reality, the highest 10 constituents by weight on the Nifty 50 are all within the inexperienced year-to-date and collectively have sufficient pull to dictate Nifty headline numbers.

 

However, drilling down into the Nifty 50, one can see lower than half i.e. 24 (on the time of writing) are within the inexperienced whereas the opposite 26 are within the crimson. But the 24 shares within the crimson i.e. trending down year-to-date, on account of weight asymmetries have considerably decrease impression on the broader index. In that context, whereas the headline numbers intuitively paints an optically pleasing image, a deeper-dive into the index portrays a much less optimistic image. One wonders if Nifty 50 with simply 50 shares and such numerous market capitalization ranges is even a good illustration of the general market. 

 

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