A recent market trend that got accentuated by the budget is the emergence of sectors that underperformed in 2007. Fast-moving consumer goods (FMCG), automobiles and pharmaceuticals have been outperforming anyway in the face of the market slide this year and they just got a leg up from the finance minister.
The excise cuts and increased consumption spending headroom can only be positive for these sectors. Their weights in the Nifty, thanks to huge underperformance and exclusions from the index, had plummeted to unsustainably low levels. That situation could now begin correcting, at the expense of some of the hot sectors of last year.
Check the facts. Pharmaceuticals have a 2 per cent weight in the Nifty, automobiles under 3 per cent and FMCG 4 per cent.
In sharp contrast, once the recently announced switches take place, power will have a 12 per cent weight, banks 12 per cent, real estate 6 per cent and capital goods 7 per cent. Does that not look a bit lopsided? Of course, the NSE has done its bit by including more and more of the hot sectors, which totted up huge market capitalisation last year, and throwing out stocks from sectors that underperformed.
The pendulum may have swung too much in the other direction and now some reversion to mean may be in order. A correction is under way not only in the rebalancing of weights in these sectors, but also in the pattern of ownership. Automobiles, pharmaceuticals and FMCG stocks are terribly underowned and as investors rush to correct this the underperformers of 2007 may actually turn outperformers.
These cycles have played out in the past, so they are well documented. A similar rebalancing away from information technology and into the ignored capital goods and banks happened after the collapse of the infotech boom just a few years ago.
Weights in the CNX 500, or the CNX mid-cap index, are not tracked as closely as the Nifty but my guess is that the changes there may be even more pronounced. There was huge overownership in sectors like infrastructure, power, oil, banking, brokerages and realty. These may need to be trimmed.
The same holds true for those momentum stocks that captured the imagination of traders last year. Some of this shift will happen towards large-cap blue chips as a flight to quality and the rest towards the more sedate and solid mid-cap names, even good dividend yield plays that did not generate enough excitement last year. The budget just happened to fall in line; sometimes events conjure together to hasten an outcome that is long overdue anyway.
(Udayan Mukherjee is an Executive Editor, CNBC-TV18)