On 2nd August 2013, the BSE Sensex and the Nifty closed at 19164 and 5678 respectively. These levels are similar to average market levels of the past year. The Sensex has maintained a tight range between 18500 and 20500 from September 2012 in a movement that may have been irritating for recent market participants who wished the indices to move upwards. I have been feeling that 19000+ is actually a dizzy level considering the actual fundamentals of the Indian economy ( refer my previous article: Markets at 16000 again’).
However, a closer look at the actual market today has managed to shake me out of this illusion. The market is nowhere near highs. In fact it is very much competing with the intermediate lows of the bear market.
Decoupling: S&P 500 and the Sensex
You may remember the infamous decoupling theory of 2007-08. The theory suggested that the Indian markets were decoupled from international markets because of the fundamental strength of the Indian economy and so would not be affected even if American and European markets burned. The theory thus argued that the Sensex could be bought even at 20000.
As the events of 2008 bore out, nothing could be further from the truth.
However, since the beginning of 2013, we have witnessed part of the premise of the theory coming true; Indian markets have decoupled from US markets. Look at the chart and you will see how the S&P and the Dow have been steadily climbing up a mountain while Indian markets have been taking a saunter along the beach.
Mid caps and Small Caps get smaller still
The two year chart of the Small Cap index demonstrates how Midcaps and Small Caps have dropped sharply whenever the Sensex has fallen but by much more and they have also fallen when the Sensex has only been flat.
The BSE Small Cap Index has fallen from 13400+ in Jan 2008 to 5178 today. This is only 90% higher than March 2009 lows. The Sensex at 19000 is 140% above March 2009 lows. The BSE 200 is 120% above the lows which seems to be a good performance. However, bear in mind that in times of correction, midcaps and small caps fall much faster and so have much lower bases at historical market lows. Midcaps and small caps are supposed to give greater returns over the long term than large caps. How is it then that we see the Sensex beating their returns so spectacularly?
Illusion behind the Sensex
The level of 19000 too is just an illusion that quickly disappears when we see the stocks that are responsible for keeping it at that level. As it turns out, the only heroes of the index have been in FMCG, IT, Auto, Pharma and HDFC (sorry to place sectors and stocks on the same plane but HDFC and HDFC Bank are a class by themselves). From middle to low levels in terms of weightage in the Sensex, they have risen to the top. Having ITC at max weightage in the Sensex was unthinkable two years ago.
Blood on the Trading Floor
Traditional brick and mortar companies are down to multi year lows across the board. Look at SAIL, BHEL, Hindalco, GAIL, ONGC, RIL, HPCL, Tata Power, Power Grid, NTPC, Tata Steel etc. Look at banking: SBI, Bank of Baroda, Bank of India etc. A behemoth like SBI is struggling at its December 2011 support level of 1600 below which it only has the March 2009 bottom of sub 1000 levels to fall to.
For midcaps and small caps, pre 2007 levels have returned and many supposedly strong stocks have given up decade long gains. It is almost as if 2004-2007 had never been. The list of stocks is too long and too painful to read out so all I am telling you is to take a look at almost any midcap in the engineering, manufacturing, mining, power, metals, fertilizers, banking, realty, textile, media space. In fact, look at anything other than IT, FMCG and pharma.
The premises of every wealth manager who has talked of investing over the long term for better returns have come to nought.
The FMCG bull run has relied on the strength of India’s consumer based economy but this cannot last forever as consumption in a bear market economy is not the same as consumption in a booming one. The auto sector is already learning this.
The writing on the wall is clear. We are in a horrible, horrible bear market which is better represented by 12000 on the screen, not 19000.