What's behind Nifty's new peak @11470?

On 9 Aug 18, Nifty hit its new peak 11,470 from the recent low of 10,200 on 2 Apr 18, a 12% return in just 4 months. This blog examines the reasons behind this sharp rally.

SEBI Re-categorization churning?
Of the Rs.23.4 Lac crore mutual fund assets, about Rs.7 Lac crores (30%) are equity based assets. Between April & July, the fund managers churned their fund portfolios to comply with SEBI's new norms. As part of this churning, many managers had to cleanse their large-cap and diversified funds by selling the disproportionate mid & small cap stock holdings - this led to a possible correction in mid and small cap indices. Additionally they had to re-invest the proceeds in large-cap stocks in order to rightly qualify as a large-cap fund.

The total sale by DIIs (Domestic Instituitional Investors) during apr-july 2018 was Rs.2Lacs crores, compared to Rs.1.7Lac crores sale in the same period in 2017, an 18% rise. Nifty rose by 5% during this period (10200 - 10700), in close heels to the Dow Jones index, which moved up by 3%. So, SEBI's re-categorization may not have entirely contributed to the 5% rise in nifty from april-june.

After the re-categorization work, the Nifty still rose by 7% (10700 - 11470) from July to mid-august, in line with DJIA which rose by 5%.

What else took Nifty from 10700 to 11470 in 6 weeks?
The 7% rally from july to 9 Aug, was largely driven by 7-10 large-cap stocks - TCS, Infy, RIL, HDFC twins, ITC, SBI, Maruti, HUL & Kotak Bank, whose combined weight is 51% of the index. While the market cap of these select stocks rose by Rs.50k crores in this short span, as many as 100+ stocks quietly touched their 52-week lows. FPIs (Foreign Portfolio Investors) too, were net sellers during this period, eliminating them as a possile cause. Evidently, this is not a broad based rally, the index is pushed up by domestic traders via these select blue chip stocks.

What should investors do?
Some parameters in the macro environment such as crude price, rupee, interest rate and bond prices are still very volatile, while others such as corporate earnings, bank credit & industry's capacity utilization are yet to turn around. With looming threats to government's fiscal target due to farm loan waivers, global trade war, US noise on sanctions against Russia & Iran, this rally certainly falls under Robert Schiller's "Irrational Exuberence" category.

So, with Nifty at a trailing P/E of 27.8 (avg 18), this is certainly a traders market - investors should not be carried away by this rally. They need to stick to their monthly SIPs to achieve sustainable returns in the long term.