The market rally over the last six weeks which took the Sensex up 15.8 per cent to close at 59,462 Friday has been driven mostly by sectors that benefited from a decline in global fuel and commodity prices.
An uptick in capital expenditure aided by a gradual moderation in inflation from its peak of 7.79 per cent in April to 6.71 per cent in July has ensured that the rally is broad based, with even the mid-cap and small cap indices rising 16.3 per cent and 15.6 per cent, respectively.
A comparison of the performance of sectoral indices over the six-week beginning June 17 reveals that companies whose revenues and profit margins are dependent on global commodity prices have outperformed. For instance, the BSE Power Index has been the biggest gainer, jumping 26.5 per cent since June 17. The capital goods index rose 22.6 per cent, industrials 21 per cent, metal 20.8 per cent, consumer durables 20.6 per cent and auto 19.9 per cent.
On the other hand, sectoral indices such as BSE Telecom, BSE Healthcare, BSE Teck and BSE IT lagged behind, and underperformed the Sensex, rising by 8.1 per cent, 9.7 per cent, 11.5 per cent, and 11.7 per cent, respectively during the six weeks.
Over the last two months, while iron ore prices dropped sharply by over 25 per cent, that of tin and copper have fallen 33 per cent and 14 per cent, respectively. Even coal prices over the last one month have declined by nearly 15 per cent.
Market experts said while industrials and capital goods sectors are benefiting from higher capital expenditure by both the government and private sector, companies are set to benefit from the decline in input costs as well. Power companies performed well in the bourses also on account of cooling-off in the input costs.
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The Chief Investment Officer with a leading mutual fund, who did not wish to be named, said, “Inflation has clearly peaked and capex revival is happening across the country. In such a scenario, banks and capex-led sectors will do well. The discretionary spending by consumers will also go up given the wage increases… this is reflected in the markets as of now.”
Pankaj Pandey, Head of Research at Icicidirect.com said there is a genuine recovery in certain sectors and they will also benefit from softening commodity prices. “Inflation cooling off is expected to drive profit margins and improve the PE (price-earnings) multiple,” he said.