Stock markets in India have continued their momentum and are presently trading on a positive note. Sectoral indices are trading on a positive note with stocks in the realty sector and banking sector witnessing maximum buying interest.
The BSE Sensex is trading up 137 points (up 0.4%), while the NSE Nifty is presently trading up 23 points (up 0.2%). The BSE Mid Cap index is trading up by 0.4%, while the BSE Small Cap index is trading up by 0.2%.
The rupee is trading at 68.62 to the US$.
The Sensex hit its 38,000 level for the first time today and is presently trading at 38,024.
Note that the BSE Sensex is up by 11.4% in the current year.
But the real picture can't be further from the truth. Only 12 stocks are responsible for Sensex touching their lifetime highs. TCS, Infosys, Reliance along with a few other stocks have led to this outperformance.
Sensex Return Skewed by Top 12 StocksThe top 12 stocks have returned 25.5% on an average while the other 19 stocks in the Index have declined by 12% on an average, as can be seen from the chart below:
What has led to this divergence?
As Girish Shetty, Research Analyst at Equitymaster, writes in a recent issue of The 5 Minute WrapUp...
- Corporate governance issues at mid and small cap companies have led to their corrections from sky-high valuations a year ago.
Even among Sensex stocks, Tata Motors, Vedanta, and Bharti Airtel have performed poorly due to structural issues in their businesses.
What happens when these top 12 stocks fail to meet the market's expectations?
Well, there's a possibility they might take down the other 19 stocks and the index further with them. In such a situation, despite the recent correction, mid and small caps won't be safe either.
In the news from global financial markets, China's annual consumer inflation rate accelerated to 2.1% in July, beating market expectations. The rise here was largely driven by a rise in non-food prices.
Further, the producer price index (PPI) rose 4.6% in July from a year earlier, compared with an acceleration to 4.7% in June.
The above inflation data is the first official reading on the impact on prices from China's retaliatory tariffs on US$ 34 billion of US goods that went into effect on July 6.
Speaking of retaliatory tariffs, note that the Trump administration yesterday announced that it would impose 25% tariffs on imports of 279 items from China amounting to US$ 16 billion.
The US Trade Representative said that the move is a part of the US' response to China's unfair trade practices related to the forced transfer of American technology and intellectual property.
This is the second tranche of such tariffs and is set to come into effect on August 23.
US had already imposed tariffs on US$ 34 billion worth of goods on July 6 but held off on a final US$ 16 billion in goods as a result of concerns from US companies.
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