Is a 'Big' Bang around the corner?

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 are¹:

• 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. 

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.

¹ 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).