So much of our time and attention is spent analysing the Nifty. It may then be an interesting exercise to see how different sectors have changed their weights over time and whether one can try and predict some future changes.
Generally speaking, sector weights give you a sense of where the extremes of optimism and pessimism lie. Sometimes sector weights get disproportionately large and sometimes unsustainably small. The ones that have gone up the most, obviously, are capital goods, power and telecom. Capital goods represented 3.5 per cent of the Nifty in March 2005, now it is up to 7 per cent. Power was 2.3 per cent then, now it is 5.2 per cent.
However, my sense is that they have some distance to go before they look top heavy. More power or capital goods stocks will be included and I would be surprised if the combined weight of these sectors does not go to 20 per cent in the next two years. NTPC is coming in soon and I think PFC, Power Grid, maybe even GMR will, in time. Real estate, too, will be substantial. Unitech has come in with a 2 per cent weight; DLF will surely follow with a near 5 per cent weight. That is 7 per cent in real estate. It is reasonable to expect that realty will account for 8-10 per cent of the index in the next few years.
So, if so many new stocks come in, which all will they displace? The stocks that come to my mind as at most risk are VSNL, Gail, HPCL and Nalco. Their current Nifty weights are marginal, they come from sectors that are already well represented and they are not the most liquid ones either. I think some or all of these will go over time.
The sectors where weights have fallen to very low levels are pharmaceuticals, automobiles and consumer products. IT is down to 14 per cent, but that is low seen only against its very high base earlier. In absolute terms it is a very decent weight. Even telecom has 12 per cent weight. Pharmaceuticals were 7.5 per cent of the Nifty in 2004, now they are below 3 per cent. Consumer products are down to 5 per cent from the earlier 12 per cent. And automobiles have declined from nearly 8 per cent in May last year to 4.5 per cent. While these do not call for automatic contrarian calls, they should be monitored for irrational pessimism. The Nifty gives you wonderful insights into how things are changing for the market and for investors.
(The writer is Executive Editor, CNBC-TV 18)