Not the time to rejoice as stock market rally not broad-based

Last minute short covering and rollover ahead of the October future & option expiry helped the BSE Sensex close at an all-time high for the second day in a row. The derivative contracts of October 2013 expired on Thursday. The index had on Tuesday closed 130 points higher at 21,164.52 while buying towards the last one hour in Wednesday trading pushed the Sensex higher to an intra-day high of 21,205.44, a whisker away from its all-time high of 21,206.77 that it touched on 10 January 2008.

Though investors would like to rejoice the rise in the Sensex, this is no time for celebration. Unlike the last time in 2008 where the rise in the Sensex had been broad-based, this time the rise in the Sensex has been due to the rise in five-six shares that include TCS, Infosys, ITC, Hindustan Unilever, HDFC and HDFC Bank.

Other stocks have not even participated in the rise. For instance, stocks like Reliance Industries, ranked second in the market-cap pecking order is still down close to 40 per cent from its all-time high of 2008. Similarly, other indices like the BSE Mid-Cap Index and the BSE Small-Cap Index are trading far lower than its previous high. The BSE Mid-cap is down 40 per cent for its all-time high of 2008, while the BSE Small-Cap index is down close to 59 per cent from its all-time high.



Certainly it's not the time to rejoice as the market rally is not broad based. If one looks at the m-cap of top 5 stocks in terms of market-cap, it accounts for 40 per cent of the m-cap of the Sensex and close to 21 per cent of the entire market-cap of the BSE.

The recent rise in the Sensex is the result of sustained foreign institutional investors (FIIs) flows. In the past two months, FIIs infused over $4.6 billion into India. The rise in flow came following the US government's shutdown that raised concerns on the recovery of US economy. Concerns are the shutdown has delayed US recovery by another 12-18 months, which means that US would take more time than expected to get back on track and until such time ease money will continue to flow into the Indian market.

But this flow will continue in the same stocks and sector which the FIIs have been investing. The sectors like information technology, pharmaceuticals, consumer durables and select bank stocks will continue to remain the beneficiary and that would push the Sensex further.  

Though FIIs feel emerging market to be the safe haven, they aren't going over-board. Structurally, the Indian economy is on a weak footing and until the investment cycle doesn't pick up and growth doesn't go back to the 7-8 per cent, India will lose its steam among global investors. Until then, the equity market movement will be speculative, depending more on external and domestic factors than economic fundamentals.