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Slowly but steadily, the stock market is creating a shield against the rupee’s depreciation. In the first eight months of the year, there has been a sharp rise in the weightage of information technology (IT) and pharmaceutical stocks —key beneficiaries of the rupee’s depreciation in the 50-stock Nifty Index. Now, these two sectors account for 21 per cent of the Nifty free-float market capitalisation, against 15 per cent at the beginning of the year.
Though their share trails those of banks and financial institutions (the biggest constituent of the Nifty, with a share of 23.4 per cent), the gap is narrowing fast, as bank and financial stocks lose favour with investors. These stocks have witnessed a sharp fall as investors, especially foreign ones, are reduce their exposure to the sector. The rupee’s depreciation has raised interest rates, which would hit banks’ profitability and growth in the coming quarter. In contrast, a weak rupee would help IT companies and drug makers to boost export earnings and profit margins.
Experts say the change in market mix would cushion the blow to the stock market from the fall in the rupee and the accompanying macroeconomic volatility. “The market gravity is moving towards defensive sectors, towards those likely to gain from a weaker rupee and a likely economic recovery in Europe and North America. This way, the market seems to de-risking itself from India’s macroeconomic instability,” said Alex Mathews, head (research) at Geojit BNP Securities.
Others agree. “This has obviously made the market resilient to macroeconomic shocks. It also highlights risk-aversion among investors. The portfolio losses for most investors have been much more than what has been captured by the fall in the Nifty or the Sensex,” says Nitin Jain, head (capital markets), Edelweiss Financial Services.
Investors’ preference for IT and pharmaceutical stocks also has to do with the fact that all leading companies in these sectors are debt-free and are sitting on free cash.
The top three IT exporters — TCS, Infosys and HCL—together have 15 per cent weightage in the Nifty, against 10 per cent at the beginning of the year. India’s top five drug makers account another six per cent of the index, against five per cent at the beginning of the year. Along with fast-moving consumer goods stocks, currently the second-largest constituent of the Nifty, defensive sectors account for 38 per cent of the index, against 28 per cent at the beginning of the year.
“The relative change in the index composition is a market signal about the future course of earnings growth. The bulk of corporate earnings growth would be accounted for these companies and it’s advisable for investors to take the hint,” says G Chokkalingam, head of research at Centrum Broking.
