Consumption and exports could be the themes to watch out for…
At a time when the world markets have been worrying about oil prices, a likely default on Italian bonds and trade wars between the US and China, the Nifty and Sensex have been scaling new highs. Some may argue that the rise in Nifty is due to the fact that Indian economy is agnostic to what happens in the world. That may be a very simplistic argument. It is true that India just accounts for 1.6% of the global trade in goods and 3.2% of the global trade in services. However, the impact of flows can be quite pronounced, as we have seen in the past. Also, India imports nearly 75% of its daily crude oil needs and is therefore not totally immune to global trade trends. Then what explains this anomaly.
Domestic flows are booming…
The fact is that Indian markets are no longer dependent entirely on global flows from FPIs. There are 3 reasons for the same. Firstly, mutual funds are seeing record flows with nearly $1 billion coming in the form of equity SIP inflows each month. That is good enough to neutralize any shock from FII outflows. Secondly, the FDI flows at over $60 billion represent the largest FDI flow into any economy; greater than even what China receives. Lastly, since the RBI has been supporting the INR at around 60/$, FIIs are confident of retaining the value of their portfolio in dollar terms. But then what explains the market’s bullishness?
All about a handful of stocks!
If you look at the larger market, the mid caps and the small caps are still way below their previous highs. Since the beginning of the year, mid cap and small cap indices have corrected sharply and that explains why the broader market continues to be under pressure. But 6 heavy weight stocks have made all the difference. If you leave out the positive impact of Reliance Industries, HDFC, HDFC Bank, Hindustan Unilever, Kotak Bank and TCS; the Indian markets would have actually been negative in the last couple of months. The Nifty level of 11,000, therefore, may not be entirely representative of the market situation overall. In fact, the joke doing the rounds of the market is that the Nifty 50 should actually be renamed as Nifty 05 as it is these 5 to 6 stocks that are making all the difference to the index overall. A negative A/D ratio indicates that the rally is anything but broad-based.
How to play your cards…
The logical question is, how to play your cards? It may be too early to adopt a value digging approach to mid caps as the valuations may still be steep. One can certainly look at mid-caps more selectively. The bigger take-away could be that consumption and exports appear to be a theme that is finally coming back. That would be the real theme to play out in the market for now!
