Trick is to look beyond crowded bets as market due for rebalancing

NEW DELHI: Nifty50’s share in mutual fund and foreign portfolio investor (FPI) holdings has not hit historical highs yet, suggesting that the market still has a lot of steam left.

But the polarisation within the Nifty pack suggests the time is ripe to go for some rebalancing and bet on the underdogs.

Institutional money has of late moved mostly to the top 10 index heavyweights, which is higher than historical trends, amid scarce earning growth and anxiety over election outcome. It is a defensive tactic, suggesting that money managers were positioning for a weaker market.

In the past, such moves were followed by the underperformance of heavyweights and the outperformance of lowest-weighted Nifty stocks after the dust settled.

“Incremental allocations can keep moving into Nifty names, excluding the top-10 stocks. This makes the bottom 30 Nifty stocks the most lucrative place to be in. The weight of top 10 stocks has reached a historic extreme. The consistent underperformance by funds has made them chase top heavyweights,” brokerage Elara Capital said in a note.


“Such points of polarisation have been visible in the past when market participants were concerned about economic growth and ended up moving a big portion of their money into a few heavyweight names. After election results, we could see the trend reversal in favour of the bottom 30 Nifty names,” the brokerage said.

HDFC Bank, Reliance Industries, HDFC, Infosys, ICICI Bank, ITC, TCS, Kotak Mahindra Bank, Larsen & Toubro and Axis Bank are top 10 Nifty50 stocks with highest weightage. Except for 2007, allocations to top 10 Nifty stocks have always peaked out at 58-59 per cent. They stood at 60 per cent at April-end.


Amid strong domestic SIP inflows and growth concerns, incremental money hid in fewer stocks. The portfolio being used to hide has hit the wall now, Elara Capital said.

Foreign brokerage UBS has raised questions over this rising polarisation within the Nifty pack.

The earnings trajectory has lagged other emerging markets materially, UBS said, adding that the broader market and midcaps have continued to struggle. “The top 10 stocks drove 75 per cent of Nifty's return since low hit on February 19. This suggests there remains some anxiety over the election outcome as well as possibly fundamentals,” it said.

Elara said the process of moving from polarisation to depolarisation may take some time, but being in a crowded portfolio at this time when the whole market has already started moving may be a risky strategy.

Money may move to top 100

In the case of the broader market, say NSE500 index, the polarisation of weightage may continue for more time as the curves are still below the top zone, the brokerage said.

“The tail stocks in NSE500 index will continue to lose relevance for a fund manager and shifting of allocations can continue to happen in the top 100 names in Nifty500,” it said.

Elara said Nifty50 has always entered begun a strong rally after such polarisations, 2005, 2007, 2009 and 2013 being the recent cases.

In the case of negative events too, the selloff may not be very large as most portfolios are already positioned for a weaker market. “Once the tide turns, we could see broadening within the Nifty,” it said.