Nasdaq, the technology weighted US equity index, hit record highs last week. What does this mean for Sensex & Nifty. While there is no direct correlation between the Nasdaq Index and Sensex & Nifty given that stocks weighting the Nasdaq are completely different from stock weighting the Sensex & Nifty, the rise in Nasdaq is both a threat and opportunity for Indian companies. The threat is in the form of Indian tech heavyweights such as TCS and Infosys feeling the effects of automation globally making their outsourcing model increasingly vulnerable. The opportunity is in the form of many Indian businesses embracing new technology and innovating to grow productively.
Currently, Nasdaq is trading at above 5500 levels, which is higher than the level that Nasdaq had made during the dot-com peak in FY 2000. 2016 has been a great year for Nasdaq with the index rising by almost 13%, Pre US Presidential election between 1 Jan 2016-7 Nov 2016, Nasdaq rose by 5.3%, Post US Presidential election (8th Nov 2016- 12 Jan 2017) Nasdaq has risen by 7.1%
Pre US election, Nasdaq was rising as markets were optimistic about companies earnings, the market was expecting corporate profits to rise in the second half of the year as job markets were showing solid gains. US GDP also started picking up, GDP rose by 0.8% in March 2016, 1.4% in June 2016 and 3.5% in September 2016. Merger activity has also picked up and due to mergers, investor started betting on deals.
Post US elections, Nasdaq composite did not rally as market were worried about policy changes and protectionism under the administration of President-elect Donald Trump. However with September GDP numbers, Nasdaq started rallying.
Repeal of Obamacare boosted the Nasdaq composite as Healthcare stocks started rallying (Healthcare sector has 13.6% of weightage in Nasdaq composite) on a hope of restructuring of the Affordable Care Act. However, Trump has recently promised to bring down higher drug prices, which would hurt the healthcare sector.
FANG(Facebook, Amazon, Netflix, Google) stocks, which had missed the post-election Trump rally, have started recovering. Facebook has gained about 9% in 2017, while Amazon and Netflix both are up more than 6%. Google’s stock is up almost 5%, FANG stocks are rising on expectations of higher earnings growth by these companies.
What has changed during these past 17 years?
The Nasdaq’s current rise has been driven by technology and health care. In a slow-growth economy, investors favour industries where revenue and earnings growth will be better than average. Tech stocks are poised to benefit as companies increase their spending on software to cut costs and improve productivity. Health care stocks have been climbing as investors bet that biotechnology companies will discover the next blockbuster drug. Today Tech and Health care stocks together hold 56% of weight in Nasdaq.
In 2000 Nasdaq was mainly driven by Tech stocks, which had weight of 56% as against weight of 43% as of 2016, Telecom stocks were also a big component after tech, having a weight of 17% against a weight of 1.12% as of 2016.
2017- Apple is the Market leader with Market Cap of $634.76 Billion, Google is second highest with Market cap of $ 562.48 Billion followed by Microsoft, Amazon, Facebook
2000 – Microsoft was the biggest company in the index followed by Cisco, Intel, Oracle, Sun Microsystem
From 2000 to 2017, all the top 5 heavyweights of 2000 except Microsoft have lost their position. Microsoft. which was the titan in 2000 is 3rd largest in Nasdaq Composite. Sun Microsystem was one of the market leaders in year 2000 but after the dotcom bubble burst, Sun Microsystem share price crashed because of falling sales. In December 2001, the stock fell to the 1998, pre-bubble level of about $100 from $200 , Year later Sun Microsystem price fell to $10 and never bounced back, finally in 2010 Oracle acquired the company.
How expensive is the Index?
Price earnings ratio of Nasdaq is 23 as of 13th January 2017, while price earnings ratio in year 2000 when Nasdaq topped 5000 was above 175 and that was mainly due to the Dot com bubble.