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Is a 'Big' Bang around the corner?

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DSP

Aug 23, 2024 4mins

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Summary

In recent years, concentrated indices like the NYSE FANG+ and S&P Top 10 have performed exceptionally well in the US due to the dominance of large-cap tech firms. India’s large-cap stocks, specifically those in the Nifty Top 10 Equal Weight index, are currently undervalued compared to the broader market. This index, which equally weights the 10 largest Nifty stocks, has lagged recently but could benefit if large-cap dominance returns. Given the US experience, India's large-cap stocks might offer a high margin of safety and potential outperformance, suggesting a possible "Big Becoming Bigger" shift in the Indian market.

It’s true that concentration risk is something you need to watch out for. However, the right kind of concentration might also do your portfolio some good.

You see, concentrated indices have been doing exceptionally well in the US. Some such indices are*:

  • the NYSE FANG+, which comprises 10 highly-traded tech giants (including Tesla, Meta, Apple, Amazon, Netflix, and Alphabet)
  • the Magnificent Seven, which comprises seven leading tech companies (namely: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla)
  • the S&P 500 Top 10 and the S&P 500 Top 50, which include 10 and 50 of the largest companies from the S&P 500 respectively.

Now, these indices have performed well mainly because the prospects for larger US companies were much better than those for smaller companies in the last cycle. But larger companies also have more durable advantages, such as the fact that they can upgrade and reorient their businesses using technological spending, which is much more challenging for smaller firms to accomplish.

Let’s now turn to India. A few years ago, the phrase ‘Big Becoming Bigger’ began seeing some popularity among Indian market watchers. But with small- and mid-cap stocks (SMIDs) having delivered a stellar performance since then, that phrase has been almost completely forgotten.

It might be time to take it seriously again. We believe the LARGEST companies now offer a high margin of safety versus the rest of the universe.

India now has a concentrated index: the Nifty Top 10 Equal Weight index. As the name suggests, this index tracks the 10 biggest Nifty stocks by market cap and assigns them an equal weight. The broader market has outperformed this index in the recent past; as a result, the top 10 stocks by market cap are now available at relatively lower valuations, with less price froth and impressive return ratios.

Consider the graph below. The ratio Nifty Top 10 Equal Weight / Nifty 500 (in yellow) has been declining, which reflects the fact that other segments in the Indian stock market have been growing better. Meanwhile, the ratio S&P Top 10 / S&P 500 (in blue) has risen over the last two years, indicating robust performance by the largest US companies.

netra-aug-large-cap-dominance

Source: Bloomberg, Data as of July 2024. These are total return indices. These figures pertain to performance of the index and do not in any manner indicate the returns/performance of this scheme.

What does this contrast tell us? If these Indian indices end up following a trajectory comparable to that of the corresponding US indices, then the current low contribution of India’s 10 largest companies to the broader market is a potential opportunity. Simply put, we might see a return to a period of “polarisation”, during which size and quality will regain the importance they usually have. During such a period, the Nifty Top 10 Equal Weight index would exhibit excellent performance relative to the broader market.

So, is India ready for a 'Big Becoming Bigger' shift? Only time will tell, but if you’re convinced such a shift is likely in the near future, you might want to consider aligning your portfolio with the Nifty Top 10 Equal Weight index.

For more actionable insights backed by data and analyses, we invite you to read the latest edition of Netra in its entirety.

*The stock(s) mentioned in this document do not constitute any recommendation of the same and the Fund may or may not have any future position in these stock(s).

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Disclaimer

This blog is for information purposes only. The recipient of this material should consult an investment /tax advisor before making an investment decision. In this material DSP Asset Managers Pvt. Ltd. (the AMC) has used information that is publicly available, including information developed in-house and is believed to be from reliable sources. The AMC nor any person connected does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Data provided is as of July 2024 (unless otherwise specified) and are subject to change without notice. Past performance may or may not be sustained in the future and should not be used as a basis for comparison with other investments. These figures pertain to performance of the index/Model and do not in any manner indicate the returns/performance of this scheme.

The statements contained herein may include statements of future expectations and other forward-looking statements that are based on prevailing market conditions / various other factors and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements.

All content on this blog is the intellectual property of DSPAMC. The user of this site may download materials, data etc. displayed on the site for non-commercial or personal use only. Usage of or reference to the content of this page requires proper credit and citation, including linking back to the original post. Unauthorized copying or reproducing content without attribution may result in legal action. The user undertakes to comply and be bound by all applicable laws and statutory requirements in India.

For Index disclaimers click here. Large-caps are defined as top 100 stocks on market capitalization, mid-caps as 101-250, small-caps as 251 and above.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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