Over the years, sectoral representation in the Nifty50 has undergone a sea of change, in line with changes in the underlying economy. The Financials which have gained weightage since 2005 now seem to be losing their control on the index, Motilal Oswal noted in a report.
While new sectors have evolved, some of the erstwhile dominant sectors have lost their relevance in the new India. Also, the recent correction led by the COVID-19 pandemic has entailed some interesting changes in the Nifty’s sectoral representations.
Financials have had a dominant run in the last decade; the contribution of BFSI has risen secularly in the Nifty50 from 22.7 percent in December 2009 to 42 percent in December 2019 (+1.9x in 10 years), highlighted the report.
While the share of Private Banks/NBFCs in the index has gone up substantially, that of PSU Banks has declined, which highlights the underlying value migration in favour of private financials.
The recent correction post the COVID-19 crisis has impacted Financials disproportionately given the economy-wide lockdown for the past seven weeks and its potential direct as well as indirect ramifications for loan growth, asset quality, and moratorium impact, highlighted the report.
Financials’ loss has been the gain of defensives like Consumer, Technology, Pharma, and Telecom. After this correction, BFSI’s weight in the Nifty is now at a 3-year low of 33.9 percent, down 810bp (versus December 2019).
Experts are of the view that COVID-19 might change the way businesses are run in the future, and stress in the banking sector might increase which is why other sectors are gaining traction that are likely to perform better.
“COVID-19 might change the way business would perform in the next two years. There is significant weightage given to oil & gas, Tech, consumer and telecom sectors as it might get more traction compared to banks and NBFC, as demand is subdued and might take more time to build up,” Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor told Moneycontrol.
“In my opinion telecom and technology stocks would out-perform amongst its constituent NIFTY-50 peers,” he said.
Oil and Gas (O&G) has seen a large increase in weight thanks to the huge outperformance of Reliance Industries. Oil & Gas gained 310 bps since December 2019 and now constitutes 15.6 percent of the Nifty in 2020.
Interestingly, a large part of the rally in Reliance Industries (RIL) has been led by developments in Telecom i.e. Reliance Jio. After the series of investments from multiple entities in Jio Platforms over the last three weeks, the company is now moving toward becoming debt-free. In fact, Reliance Jio now constitutes 50 percent of RIL’s SOTP.
Technology has seen good interest owing to its defensive nature with strong cash-rich balance sheets while telecom is expected to see the minimum impact of COVID-19. Hence, the sector has seen significant outperformance in the recent correction, added the note.
“The COVID-19 impact has thrown all dynamics out of gear of even the most resilient of sectors, and most of the sectors are grappling to survive this onslaught of colossal financial damage. Hence, investors are advised to go slow in investing, and not rush in all at once,” Aamar Deo Singh, Head Advisory, Angel Broking Ltd told Moneycontrol.
“Also, diversification and focus only and only on quality stocks is the need of the hour. Till such time, we do not see a clear cut way out of the present crisis, it would too early to say that we are out of the woods yet,” he said.
48 percent of Nifty50 constituents remain unchanged:
As many as 48 percent of Nifty50 constituents or 24 stocks remain unchanged over 15 years. Of these 24, four are from Auto, Oil & Technology, each, two from Private Banks, Consumer, Metals & Healthcare and one each from NBFC, Capital Goods, PSU Banks & Telecom.
Stocks that remain unchanged include Infosys, HCL Tech, ITC, HUL, ICICI Bank, HDFC Bank, Tata Motors, Maruti Suzuki, M&M, and Hero MotoCorp, according to Motilal Oswal report.
The combined weight of these 24 stocks declined to 73.9 percent compared to 77.5 percent 15 years ago, but was up from 60.2 percent in December 2007.
In Private Financials, all three stocks – HDFC Bank (+8.7%), HDFC (+5.2%) and ICICI Bank (+1.6%) – have seen an increase in weights over the last 15 years. Among these 24 stocks, oil & gas has been the biggest loser in terms of weight, and in Consumer, ITC has significantly underperformed HUL and for the first time, HUL’s weight in the Nifty has overtaken ITC.
Experts feel that these 24 companies are a sectoral leader and could well remain part of the Nifty50 in the near future as well; hence, investors should remain invested in case they hold the stocks.
“Most of the high performing giants continue to be on Nifty50 list, but I expect some addition from the consumption sector and a few insurance stocks. Half of the constituents of Nifty50 have been there for 15 years and in my opinion, they will continue to be part of it,” said Garg of CapitalVia Global Research Limited.
(Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.)
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Published at Mon, 18 May 2020 05:10:58 +0000-Financials lose weight! 24 stocks have been part of Nifty for past 15 years