Financials lose their heft in the Nifty post COVID-19

The Nifty is a market-cap weighted index and only considers free float capital. Hence, a stock with a higher free float market cap automatically gets a higher weightage in the index.

Jun 23, 2020 09:06 IST India Infoline News Service

One of the best ways to understand the underlying market trend is to look at the way the Nifty weights have shifted. The Nifty is a market-cap weighted index and only considers free float capital. Hence, a stock with a higher free float market cap automatically gets a higher weightage in the index. When we apply this logic to sectors that constitute the Nifty, you get clear insights into how the importance of certain sectors changed over time.

It is simple to answer this question intuitively. For example, banks have not done as well in the last six months while consumer stocks and telecom stocks have done better. Similarly, pharma has shown a sharp bounce and outperformed the Nifty in 2020. Of course, if there is one specific stock that has defined this big shift in the Nifty, it is Reliance Industries but we shall come back to that point later.

Sectors that lost heft in the Nifty
Data Source: NSE

You would have probably guessed that these two sectors would have lost heft in the Nifty. Let us look at automobiles first. The post COVID-19 impact on the automobile weight has not been too significant. That is because; most of the damage to the auto sector was already factored in over the last two years. Since the middle of 2018, auto stocks have been hit by weak demand, higher fuel costs, tighter funding markets and higher insurance costs. All these made it unattractive for individuals to own cars. The demand from Ola and Uber was also dwindling as operators found it less lucrative and demand saturated. As a result, weight of the auto sector fell from a high of 11.80% in late 2016 to a low of 5.50% in June 2020.

The big loser in terms of heft was banking and financials. Since the Lehman crisis of 2008, banks had seen their weight in the Nifty grow from 12.7% to a whopping 42% by late 2019. The top-25 value list was dominated by banks with HDFC and Bajaj Finance being notable exceptions. Ironically, demonetization did not impact the banks but only concentrated more market value in the larger private sector names. But things changed for the worse in 2020 due to the COVID-19 lockdown resulting in fears of rising NPAs and the cash flow challenges caused by the EMI moratorium. The rich valuations only exacerbated the matter for financials as their combined weight in the Nifty fell from 42% to 31.1% in 6 months.

Sectors that gained weightage in the Nifty index
Data Source: NSE

While financials and auto stocks lost heft in the Nifty, there were some obvious winners too. Let us first look at the passive gainers. Two such sectors were the consumer space and the technology space. Both these sectors saw an increase in their weight in 2020, more because they managed to hold price in the midst of difficult times. IT was more of a global play and even as global IT spending was down, the weak rupee helped the IT sector to hold value. Unlike banks and industrials, the IT companies were less vulnerable to the COVID lockdown. Consumer goods, especially perishables and hygiene products, saw a spurt in demand in the midst of COVID-19. They may not have outperformed but steadiness in their price ensured that they gained weight from 10.2% to 13.3% during 2020.

Pharma was the real joker in the pack. The sector had been almost written off after its weight in the Nifty fell from 6.3% in late 2016 to just 2.1% in late 2019 due to extraneous factors like FDA investigations, greater competition in generics, client consolidation etc. However, in 2020, pharma has gained weight in the Nifty from 2.1% to 3.1% as India emerged as the obvious choice for international pharma companies to manufacture anti-COVID generics at low cost with the lowest time to market. That positioning was reflected in the weight of pharma stocks in the Nifty.

Finally, we focus on the combined story of oil and telecom. What is the link between these two sectors? It is Reliance Industries. RIL funded its massive telecom / digital push with the profits of refining and petchem and today it is the digital property that is resulting in RIL market cap soaring to $150 billion. The combined weight of oil and telecom was just 11.7% in late 2016 when Jio was launched. Since then it has touched 14.7% in late 2019 and a whopping 19.8% by June 2020. While that is largely the RIL story, it has also been backed by Bharti Airtel, which has now emerged among the five most valuable stocks in India. But Reliance in general and Jio Platforms in particular will go down as the singular factor driving the change in weights of the Nifty in 2020.

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