Top 5 stocks contribute maximum to Sensex rally

MUMBAI: Critics of the bull run say that the rally is finally running out of steam. Bulls, on their part, see the latest bout of correction as nothing more than a short-term blip arising from global concerns such as the crisis in the US subprime loan market and a possible unwinding of yen carry trade.

Irrespective of whether the market recovers or not, fewer stocks have been contributing to the rise in the Sensex over the past four years, and it looks very unlikely that the trend may change in the near future.

Top of the heap

For instance, an analysis by ET shows that in 2003, on an average the top 5 stocks contributed some 60% to the gains in the index, whereas of late, the top 5 stocks have been contributing nearly 120% to the gains in the Sensex. Much of this concentration has been happening over the past few months. A more than 100% return on the Sensex from the top 5 stocks indicates that many stocks have been underperforming. This shows the concentration in the rally.

What does this mean to a lay investor? Historically, it’s seen that when fewer stocks contribute to the gains in benchmark indices, we are near the top or may have already crossed the top. One example is perhaps the technology-led rally that burst in 2000, where only the technology stocks in the Sensex performed.

The contribution by tech stocks to the rally was very high. And the crash followed soon after. Though at present, experts do not see any bubble, the concentration at the top is making market participants jittery.

There is a clear lack of breadth in the rally and analysts lament the fact. Religare Securities chief investment officer Kunj Bansal said, “If we look at the calendar year 2006, only nine companies outperformed the Sensex, which is fairly low. There has been concentration of interest in the stocks that belong to the high-growth sector.”

He added that the investors want to invest in those companies whose market share has gone up, whose operating margin along with topline and bottomline have also risen significantly. They are not ready to put in their money where all these positive developments are not present.

Earnings review of Sensex companies shows that India Inc has been delivering well so far. But, markets always tend to focus on future earnings; what lies ahead is the key. With liquidity, which has been the driving force of the rally in the previous few months, suddenly in short supply across the globe, the going could get tough for the bulls.

Latest shareholding pattern in frontline companies reveals that foreign funds’ stakes have mostly remained steady or reduced marginally.