Index movement and market-cap growth may not necessarily go hand in hand. A study of global stock market trends in the current calendar year, with particular reference to India and China, clearly reveals the lack of correlation between market cap of companies listed in these markets and their respective indices.

As far as India is concerned, analysts attribute the ‘mismatch’ largely to factors outside of benchmark indices — Sensex and Nifty. There has been an unprecedented rise in valuation and fund-raising activity among many medium, small-sized and newly-listed companies, resulting in enormous wealth generation. The gap is expected to widen in the coming days, with the market likely to consolidate at current levels. However, the fund-raising activity may continue in the future as well, say analysts.

Since January 2, 2007, the Sensex has risen 9.5% before closing at a record high of 15273 on Friday. Interestingly, the combined market cap of all companies listed on the BSE has jumped nearly 22% to Rs 44,650 billion during the same period. The Sensex has, in fact, underperformed the broad-based BSE-500, which surged 13.4% to cross the 6K-mark at 6032 on Friday. This means, many stocks listed outside the Sensex have appreciated more than the 30 pivotals.

“Even though the Sensex is at an all-time high, year-to-date (YTD) returns from the market is only 9%, paradoxically amid record FII investments. Increase in the supply of corporate papers, FCCBs, GDR/ADRs, QIB placements and IPOs, has led to the expansion in market capitalisation disproportionately to that of the indices,” said MSS Securities director Ajit Sanghvi. A look at the recent FII investment trend reveals that fund flows have been quite strong this year compared with last year.

This, however, is not reflected in the Sensex movement as a major part of FII investments was absorbed into mega IPOs by companies like DLF and ICICI Bank. The 9.5% rise in the Sensex came amid FII inflows of Rs 33,313 crore, or $ 7.9 billion. With a little higher investment of Rs 36,540 crore, or $ 8 billion, the index had rallied nearly 50% to close at 13787 by 2006-end. Prime Database managing director Prithvi Haldea said there is nothing unusual in market cap recording higher growth. In the past, there have been situations when market cap rose despite a fall in benchmark indices, he said.

“The mismatch exists because the 30 Sensex companies currently represent only 1% of the traded universe and account for around 50% of the combined market cap,” said Mr Haldea. Many companies in retail, real estate and healthcare sectors are still in the non-listed domain so there is a huge scope for improvement in valuation and market cap outside the Sensex, provided the mood remains positive, he added.

China is another market which witnessed a trend similar to that of India. China’s SSE Composite jumped 46%, while the market cap shot up 131%, though on relatively lower base compared to India. Unlike India and China, many other global markets have shown some kind of correlation between index and market cap growth in the current calendar year.