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Nifty: Equal weight Nifty hints at broad-based rally

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ET Intelligence Group: The dance of democracy this poll season is leaving its distinct impression on more things besides the raised tactile buttons on voting machines. The Nifty is taking on a pronouncedly more democratic texture – evident in the recent performance of its constituents.

So, how secular – and broad-based – is this progress of democracy?

The Nifty 50 Equal weight index—with equal weights assigned to all constituents—has been consistently outperforming the benchmark Nifty 50 index based on market cap weights this past year.

The outperformance of the Nifty 50 Equal Weight index suggests that contribution of the Nifty constituents is becoming broad based in the ‘V’ shaped recovery rally. This marks a significant departure from the concentrated market rallies before the outbreak of the coronavirus. The Nifty 50 equal weight index rose 95 per cent in the last one year, compared with 80 per cent return of the Nifty 50 in the same period, data from Nifty indices compiled by ETIG showed.

Nifty 50 delivered a return of 53 per cent between 2016 and 2019 owing to the sharp outperformance of index heavyweight Reliance Industries, while the Nifty50 equal index had an unimpressive return of 28 per cent in the same period, an indication of a narrower rally in that period.

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In the past six months, Nifty 50 Equal weight index outpaced the Nifty 50 index by 9 percentage points, thanks to more than 100 per cent returns on the smaller weightage companies such as , Tata Motors, Adani Port and Hindalco. The combined weightage of these four stocks rose to 3.37 per cent at the end March 2021, compared with 2.1 per cent in September.

The weightage of Tata Steel and JSW Steel rose to a multi-month high after consensus earnings were upgraded in response to a record price surge.

In addition, the renewed interest in the financial stocks, particularly in the state-owned enterprises, boosted the weightage of the financial stocks in the Nifty 50.

SBI, India’s largest PSU lender, delivered a return of 94 per cent to take its weightage in the Nifty 50 to 2.2 per cent, a gain of 73 basis points in the last six months. Private lender ICICI Bank has had the highest weightage expansion of 1.29 percentage points to 6.34 per cent in the Nifty 50 at end of March 2021. Cumulative weightage of the financial stocks in the Nifty 50 rose to 38 per cent, a gain of nearly 600 basis points from the end of September 2020.

RIL’s weighting has slid to 10.2 per cent in March from 14.9 per cent in September. HDFC Bank, with a weight of 10.4 per cent, has delivered just a few percentage points higher than the Nifty 50 in the previous six months. With two index heavyweights lagging compared with stellar performance of the low weighted stocks, the performance of the equal weighted index surpassed the Nifty 50 index.

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