Making sense of the markets

There are 30 stocks that make-up the Sensex and 50 stocks that make-up the Nifty. Now, out of these a few including Reliance, TCS, Infosys, HDFC , HDFC Bank and ICICI Bank together have a weightage of nearly 40 per cent in the Nifty.

In the past one year, all of these stocks have moved higher, pushing the benchmark Sensex to record levels, while several stocks are hitting 52-week lows, including high quality names.

So, in short, big names are chasing these few stocks, pushing the indices near record highs, while the broader markets are left languishing.

In fact, some stocks like L&T Finance Holdings, TV Today Network have a strong pedigree and they too have been hammered down to 52-week lows.

In the NBFC and HFC space too there is a clear dichotomy. On the one hand Indiabulls Housing, L&T Finance Holdings, Edelweiss have plunged, while Bajaj Finserv, Cholamandalan and Sundaram continue to gain momentum.

Financial markets rattled by governance and debt issues

Stocks that have governance related issues have plunged. IndiaBulls Housing, which had a case being filed for alleged siphoning-off of funds, plunged to Rs 500 earlier this week. At these levels the dividend yield on the stock itself will be 7 per cent. Nothing has so far been proven against the promoters, and the company claims to have a very strong liquidity position.

ADAG group companies have fallen like nine pins following worries over debt repayment and losses at Reliance Power. Yes Bank has fallen over concerns of mounting NPAs and ability to raise capital.

This is why most of the domestic and foreign institutional investors have kept investing in the same set of stocks: HDFC Bank, HDFC, ICICI Bank, TCS, Infosys and Reliance. Together, these stocks command 40 per cent of the wightage, thus pushing the benchmark indices higher.

Is it worth buying into financial stocks?

There is an element of risk here. If, the IL&FS fiasco gets compounded and if DHFL defaults, we could have financial stocks, particularly those that have fallen sharply, being vulnerable to further falls.

Having said that there is little doubt that in some cases valuations have turned attractive. Take the case of IndiaBulls Housing, where the dividend yield itself is now near 7 per cent. L&T Finance Holdings is a high quality name, which is almost certain to see recovery in the days to come.

Yes Bank, looks a lot more riskier, given that all depends on capital raising ability. On the other hand solid names from the NBFC space like Sundaram Finance and Cholamandalam Investment come at a significant premium. It's a strange predicament - does one go for the slightly riskier bets that are cheaper, or does one go for the quality names that are not expensive, but significantly expensive.

It really depends on your ability to take risk. The only one piece of advise is to invest for the slightly longer term, wherein liquidity issues and IL&FS worries would be over.

Disclaimer

This article is strictly for informational purposes only. It is not a solicitation to buy, sell in securities or other financial instruments. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author of this article do not accept culpability for losses and/or damages arising based on information in this article.

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