It is always hard to make stock predictions for the next 5 years, leave alone making stock market predictions for the next 20 years. We are therefore not trying to predict the level of the Nifty or the Sensex for the next 20 years. Frankly, back in 1997 it would have been impossible to predict that the Nifty would have growth 7 fold in the next 10 years and virtually failed to cross that peak for another 8 years. But that is exactly what happened. Our Nifty predictions 2035 are more about the likely composition. Again, the focus is not on specific stocks or sectors but on broad trends. But why is this Nifty mix so critical?
How the Nifty composition shifted over the last 20 years..
If you compare the Nifty composition since 1995, you will find that only 15 out of the 50 companies have remained in the Nifty index after 20 years. Check out the chart below..
If you look at this differently, only 30% of the companies have continued in the Nifty at the end of 20 years and that is a high 70% attrition rate. Therefore, one can safely assume that going ahead, by 2035, only about 30% of the current crop of companies will still remain in the index. It would, therefore, be interesting to understand what will drive the inclusions and exclusions in the index over the next 20 years. Some key features of the shift over the last 20 years were as under:
None of the PSUs were present in the index back in 1995 as the entire divestment process started after that. So, heavyweights like ONGC, IOC, BPCL, HPCL and GAIL are all missing and were added subsequent to their divestment.
Private Banks have seen a huge inclusion in the Nifty. While only HDFC Bank and ICICI Bank were present in the Nifty in 1995, we now have newer private banks like Axis Bank, Kotak Bank, Yes Bank and IndusInd Bank included in the Nifty. Even NBFCs like Indiabulls Housing and Bajaj Finance have made it to the Nifty.
It is hardly surprising that IT stocks were a subsequent addition as were many pharma companies. Stocks like TCS, Infosys, HCL Tech, Wipro, Lupin, Sun Pharma, and Cipla were all subsequent additions. It also reflected the shift in market valuation focus from hard assets to soft assets and also placed a greater premium on global Indian enterprises.
Finally, there was telecom which did not exist as a competitive industry back in 1995. Of course, the telecom industry in India was virtually invented by Bharti Airtel. Later Bharti Infratel, the towers unit of Bharti Airtel, also got added. Subsequent to the merger of Idea and Vodafone, we could also see the merged entity come back and add heft to the Nifty.
How the sectoral mix of the Nifty has shifted in the last 20 years..
The big story of the last 20 years appears to be rising weightage of the banking and financial sector. Two sectors have seen a sharp downgrade in the last 10 years. With crude oil prices coming down sharply over the last 3 years, the weightage of the energy sector has come down sharply from 28.5% in 2005 to just 13% I 2019. Similarly, IT which had a weightage of 20.3% in 2005 has fallen to 11.6% in 2017. These two biggest losers in weightage have helped the financial services sector increase its weight substantially. Hindustan Unilever and ITC continue to dominate the consumer goods sector but its share has seen a sharp fall. Most of the consumer goods MNCs have been dropped from the index over the years while the sector itself has been under growth and margin pressure.
What does that bode for the Nifty composition in 2035?
As we said earlier, it would be too optimistic to predict the composition of the Nifty in 2035. But here is how it could change..
Consolidation could play a big role in the next few years. We are seeing that in the telecom where the industry is gravitating around a handful of players. We could see that in sectors like IT, Pharma and energy. In the energy space we are already talking about a mega oil behemoth which could be formed by the merger of the leading oil and gas companies. In IT and pharma we could see the leaders emerge and build on their strengths sharply in the coming years. That will create a winner-take-it-all situation. Watch out for that!
You could see the Baby Bell syndrome play out in a variety of ways on the index. For starters, the Reliance Group could hive off its telecom and retail business into separate businesses and both could emerge as key players in the index. We could see Tata Group and the Birla Group doing a similar kind of realignment of business and we could see lateral additions to the index.
Lastly, we could see representation from sectors that are not exactly represented in the index today. What are the possibilities? Digital plays don’t find a place in the index but they could soon be on the way. We could see new segments like nanotechnology; robotics, artificial intelligence and other arcane areas enter the mainstream. For that matter we could see some of the big online retailers and online enablers like Flipkart, Ola and Paytm get listed and occupy a place in the Nifty.
The bottom-line is that the Nifty is most likely to undergo substantive changes by 2035. For all you know, the Nifty in 2035 could be largely unrecognizable in its current form. May we live in interesting times!
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