Just two more days to go before the end of 2014. If you look back at the year gone by, it appears to be a year of renewed hope and optimism in the Indian stock markets. The change of government at the Centre infused confidence in an economy that was faltering on multiple fronts. The fall in international commodity prices, particularly crude oil, further provided the much-needed boost by lowering inflation expectations and raising hopes for interest rate cuts.
With 2015 just around the corner, one wonders what the New Year would bring. Will the market rally continue in 2015? Or will we see some major corrections? Which stocks will outperform? Which ones will be duds? Well, we will leave these questions for a later discourse.
For now, we want to share a one-line message from a folktale that goes hundreds of years ago.
The story goes thus... A certain monarch from the Eastern side of the globe once ordered his counsel of wise men to invent him a sentence that would be ever in view. His only condition was that the sentence should hold true in all times and situations. Here is the line that his wise men shared with him:
In our view, if there is one line that describes the ever-changing, dynamic nature of stock markets, this is it. It's very simple to understand, isn't it? But how challenging to follow!
Just recall how much pessimism there was about the Indian economy in the middle of 2013. People were writing off the India story. Every macroeconomic indicator was sending a negative signal. The political logjam and corruption only exacerbated matters.
And how just some months later investors began to see a light at the end of the tunnel. 2014 has been a journey from hope to optimism. Where from here now? Well, whatever be the future course of the economy and the stock markets, remember that nothing in the stock markets is static or permanent.
Actually, there was a piece of news we came across some days ago that reminded us of this important lesson. According to some financial dailies, the exposure of mutual funds to bank stocks surged to a record high of nearly Rs 706 billion at the end of November 2014. That's 21.23% of their total equity assets under management. In fact, we just checked (see chart below) the sector-wise weightage of stocks in the S&P BSE Sensex. Lo and behold, finance stocks account for 31.98% of free float market capitalization of the Sensex. This is indeed something that should draw your attention and scrutiny. The reason being that the last time the sector had witnessed a similar kind of index weightage was back in early 2008. During the market crash that followed, the weightage had dropped down to below 20%.
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What do you make of this?
Yes, we agree that banking and finance stocks may do very well if interest rates come down and the investment cycle revives. In general, finance stocks are a good proxy play on the economy. If the economy does well, they tend to be direct beneficiaries.
But let us also tell you, all sectors go through their cycles. There can be phases when a certain sector gains a lot of popularity amongst investors. Stocks from that sector may witness a strong rally that may extend for some years. This, consequently, causes their overall weightage in the index to go up. Sometimes this results in bubble formation, which eventually has to go through the contraction cycle.
During various phases of the markets, different sectors have driven the market rallies at different points in time. We would like to bring to your attention that at the peak of the tech bubble, technology stocks accounted for 45% of the index weight.
We are not hinting that banking stocks are due for a correction. But it is certainly something that should not escape your attention. We would suggest you evaluate the sector-wise weightage of stocks in your portfolio. If you feel you are overexposed to a particular sector, you may want to trim down your holdings to more reasonable levels, so that the risks emanating from a particular sector could be minimized. We understand that this may be a bit difficult to do, especially if you have enjoyed solid returns from a particular sector. But we think it is better to be safe than sorry.
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