Corporate earnings have been disappointing recently, yet Indian equities continue to rally at premium valuations. According to brokerage Nomura, this is due to changing sector weightages in the Nifty index.
Over the past decade, the weightage of sectors like financial services and consumer discretionary has significantly increased. The financial services sector now holds the highest weightage in the index, with retail banks performing well while state-owned lenders struggle due to their stressed balance sheets.
Only a few stocks within the financial sector have driven the Nifty’s rich valuations, despite the sector’s relatively low contribution to overall gross value-added (GVA) in the economy. Financial services account for just 6% of total GVA at constant prices in FY16, but this figure rises to 8.3% when excluding agricultural and low-representation segments.
Madan Sabnavis, chief economist at Care Ratings Ltd., notes that the increased weightage of financial services in the Nifty is more a result of specific stock performance rather than the sector as a whole contributing significantly to economic growth. Credit growth remains subdued, and the NPA issue has not been fully resolved.
While higher sector weightage in the index may suggest increased financialization in the country, it may not accurately reflect the true state of the economy.