Considered in a proper historical and comparative perspective, the 30-share Sensex, which breached the 25,000 mark in May 2014 and the 50,000 mark on January 21, 2021, smashed the psychological 75,000 barrier, zooming to 75,124 (intra-day lifetime high levels) on April 9, 2024 on gains in FMCG, energy and metal shares.
While markets dipped subsequently, closing 0.08% down following profit booking in index major Reliance Industries, the surge of almost 25% over the past year has been remarkable. On April 9, 2024, the combined market capitalisation of the BSE listed firms surpassed ₹400 lakh crore with the BSE Midcap index soaring almost 67% and the Smallcap index rising 65% over the past year. The NSE companies with maximum gains were Infosys Ltd, Apollo Hospitals, LTIMindtree Ltd, Tech Mahindra Ltd, Adani Ports and Special Economic Zone.
The market was also buoyed by strong US economic data, oil price dipping from a five-month high to $ 85/barrel, easing policy rates by central banks in developed countries, easing monetary policy in India with softening food prices and positive Asian market. Investing in mid-cap companies, which are ranked 101 to 250 within Nifty 500 index, seemingly reduces selection bias because of growth potential, diversified portfolio across key industries and low cost. Further, the share price spikes driving the market boom transcends the 30 stocks. Since 2014, domestic institutions have invested nearly 40 % more than foreign institutions in Indian markets. Sensex surged 700 points on April 29, 2024 while Nifty50 climbed 150 points to over 22,550 and India VIX rose 12% to 12.25. Top five index contributors were ICICI Bank, SBI, HDFC Bank and Kotak Bank. Nifty Bank index hit its highest intraday point of 48,979.10. The surge stemmed from banking stocks momentum; rise in Nasdaq Composite to 15,927.90 (up 316.14 points/2.03%) while S&P 500 rose to 5,099.96 (up 51.54 points/1.02%); Japan’s Nikkei 225, Hong Kong’s Hang Seng index and China’s Shanghai Composite gained between 0.81% and 0.65%. Crude oil prices were low amidst reduced geo-political tensions after the capped Israel-Iran attacks and reassuring Cairo’s peace talks.
Interestingly, Sensex has not slipped below the 70,000 mark since it breached its first on December 14, 2023. Evidently, this is not a case of straws in the wind and the brightening outlook is part of a pattern-a pattern that is at once both clear and inexorable, a pattern of swift rise, breadth, and surging investors.The New Normal-Critical Enablers of ‘India’s Decade’
Why do we make such an ostensibly outlandish claim? Let us examine the big picture, connect the dots and draw meaningful inferences. The Indian process of economic growth and structural transformation has been marked by 7% growth in FY 24 juxtaposed against the global growth of 3% worsened by rising global indebtedness and cost of living crisis and robust earnings expectations in Q 4 of FY 24, particularly banks and auto manufacturers.
The overarching macroeconomic setting is characterised by softening CPI inflation from 5.7% in December 2023 to 5.1% during January and February 2024 as against real GDP growth at 7.6% for FY 24 and real GDP growth for FY 25 is seen at 7% because of manufacturing growth and rising services exports (10% of GDP).
According to ‘Recap 2024. Crystal Gaze 2025’ by Pantomath Group, India’s fifth-largest global market cap ($4.5 trillion) is likely to hit $10 trillion by 2030. The US ($44.7 trillion), China ($9.8 trillion), Japan ($6 trillion) and Hong Kong ($4.8 trillion) have greater market cap than India. India could be the third-largest economy by 2027, and the market cap will reach $10 trillion by 2030.
Going forward, India will consolidate its position through important transformative triggers and drivers. The demand side is boosted by consumer boom, ascendant middle class and green transition.
Demographic dividend, corporate sector’s return on equity exceeding the global average, greater access to finance, the coming to age of the financial sector and streamlining of physical infrastructure (national road network grew by 60% over ten years, twice the previous decadal rate) and digital infrastructure, digital transfer-payments, modern capital markets and banks, and a unified digital tax system drive the supply side. The IMF has revealed that “digitalization-driven productivity gains” (e.g., monthly use of payment system by 300 million) in India have acted as a force-multiplier; a trend reinforced by macroeconomic growth, robust democratic and business frameworks, demographic dividend, sustained policy reforms, rising global significance, “military-industrial complex”, space technology, logistics, fintech and AI. Look how far we’ve come!
Heightened external uncertainty was exacerbated by global tensions, including Israel, Iran, Palestine, Ukraine, Russia, etc., and volatile crude oil prices. But as Ms. Gita Gopinath, the IMF’s first DMD stressed “the disruptive effects of these swings on emerging market economies are much more muted than in earlier episodes… because emerging and developing countries have developed much stronger macro policy frameworks to be able to deal with shocks”. Viewed thereof, the Indian economy is truly on a sustained 7 % growth course. And, since the capital market is a microcosm of the broader Indian economy, the capital market could maintain its steady upward climb and a secular bull run could be in the offing.
Going forward, 75 basis points policy rate cuts may occur in a gradual and calibrated manner in FY 25 because of downward trending inflation trajectory and the trade-off between growth and inflation.
Dotting the i’s and Crossing the t’s of money Sloshing Around – Discerning a Pattern
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful”. Warren Buffett
It has often been debated whether this stratospheric level is a flash in the pan or is an integral part of a higher onward march of the capital market. Retail investors of India have been consistently investing in Mutual Funds through the SIP route with an average monthly investment of ₹20,000 crore, i.e., an annual investment of ₹2.50 lakh crore. There are 80 million unique investors investing money in the Indian stock markets through NSE. These 80 million investors constitute 50 million unique households, which is 17 % (about 5 % about two decades ago, nearly 60% share in the US) of India’s all households cumulatively.
Follow the money, honey!
This steadily rising proportion (increment of over 12 crore demat accounts in a decade) has been facilitated by burgeoning middle class, higher penetration level of mobile phones, growing popularity of trading apps, soaring capital market and a pandemic-driven digital thrust. The growth saga is succinctly captured in the seven-fold rise in individual demat accounts from 2 crore accounts in April 2015 to nearly 15 crore in February 2024. This kind of transformed equity asset class, shifting paradigms, data analytics and user experience with technology has created a silent revolution in the country. Most financial transactions, financial investments and holding of financial investments are done digitally relegating the customary banking/investing system to a miniscule level, thereby enhancing efficiency and efficiency and slashing time and cost reminiscent of William Wordsworth’s words,
“Bliss was it in that dawn to be alive,
But to be young was very heaven!”
This is the way to go because as Robert G. Allen pithily asked “how many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case”.
Granular Examination across Asset Classes- the Dance of Markets
“Equilibrium is inseparable from motion and all equilibrium is relative and temporary” Friedrich Engels
While there are several reasons for this surge, peaks and troughs, booms and busts are an integral part of the stock market saga – much like the waves of the sea, which incessantly rise and fall. Hence, there could be an element of “irrational exuberance”, “froth” and “bubble”. Of the three asset classes – equity, debt and gold, equity is undoubtedly becoming an increasingly important asset class. Accordingly, undivided attention on long-term growth through asset allocation, focusing on time horizon, asset allocation being a function of the individual’s return-volatility appetite, quality assets, and time in market over timing, i.e., staying invested rather than obsessively concerned with catching the top and bottom of the peak and the trough is required. Asset allocation strategies, however, work better at equity market highs.
Equity retail participation rose strikingly as the number of mutual fund folios grew from less than 3 crore in March 2014 to over 11 crore in Dec 2023. Retail investors, including high networth individuals, account for 91% of the Indian fund industry’s nearly ₹ 22-lakh -crore equity assets under management (AUM) surging at 30% CAGR over the past decade. Further, monthly SIPs surged from a modest ₹1,200 crore in 2014 to over ₹ 19,000 crore in 2024.
Domestically Driven Rally
With concerns about Mauritius Tax Treaty, US Bond Yield surge and the geopolitical tensions, there were net outflows of ₹6,300 crore till April 26. Cumulatively, the net FPI investments into Indian equities in 2024 stood at ₹4,589 crore. FPIs were net debt sellers also with outflows of ₹10,640 crore till April 26. However, despite the April selling, FPIs total net investments into debt were positive at ₹45,218 crore till April 26, 2024. All FPI equity selling has been absorbed by domestic institutional investors (DIIs), HNIs (High high-networth individuals) and retail investors.
Jungle out There-Disruptive Times Need Innovative Strategies
Moving goalposts and shifting perspectives in this VUCA world are characterized by remarkable technological transformations and heightened business complexities; explosion of Internet-fuelled information; technological automation and progressive globalization. The SIP-driven rise of individual investors has provided mutual fund companies the potential and the heft to successfully withstand foreign fund selloffs. This welcome financialisation of savings, progressively increasing digitisation in a manner, which is unprecedented in India and unparalleled in other geographies and ease of doing investment with mobile platforms and UPI has provided tailwinds to the vibrant Indian market. This rapidly emerging investing culture is a game-changing development that is here to stay and transform the financial markets.
Gary Hamel stressed, “we stand on the threshold of a new age – the age of revolution…. For the first time in history we can work backward from our imagination rather than forward from our past”. This thought of transcending the traditional confines of linear thinking continues to resonate today.
RBI’s Prism
According to a working paper on ‘Equity Markets and Monetary Policy Surprises’ by Mayank Gupta, et al, DEPR, RBI from January 2014 to July 2022, “…equity markets are affected more by the changes in the market’s expectations of future monetary policy (path factor) than the policy rate surprise (target factor) which is in agreement with the conventional thinking that equity markets are forward-looking”. The equity volatility on the policy day “is affected by both target and path factors, as markets digest the policy announcements and traders adjust their portfolios throughout the day”.
The target factor captures the surprise component in central bank policy rate action, while the path factor captures the impact of central bank’s communication on market expectations regarding the future path of monetary policy. While the short duration windows aim to control other potential drivers of equity prices, the monetary policy announcements are accompanied by regulatory and developmental measures which can also impact markets. The sparse occasional trading in the OIS markets and other domestic and global developments during the narrow window can also impact the analysis.
Key Insights and Future Perspectives- a Tale of Two Halves
Despite 8.66% (Feb. 2024) consumer food price index, the probability of healthy output and declining food inflation make us sanguine on the rate cutting front. However, all is not hunky-dory – not by a long shot. With a price-to-earnings (P/E) ratio of 25.54- above the average of 18.61 between 2003-04 and 2007-08 and 23.81 between 2014-15 and 2023-24, there are persisting valuation concerns. There are also issues of corporate profits, earnings growth, continued inflow of funds into equity MFs and broad-based consumption. But the capital market does not progress linearly and progressively unidirectional manner. Despite the choppy data and negative shocks, the stock market direction over the long haul is unequivocally clear and positive. This virtuous cycle a la Don Bradman (though even he failed sometimes) lead to a “buy India, sell China” strategy.
Enduring compounding could zoom Sensex to 1,50,000 by 2029-“the best is yet to be” (Robert Browning). But as Ben Graham said “the individual investor should act consistently as an investor and not as a speculator”. Similarly Nobel Laureate Paul Samuelson stressed the quality of patience, when he averred “investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas”.
Sane and sage words, these! The holy grail of investing!
(The author Dr. Manoranjan Sharma is Chief Economist, Infomerics Ratings. Views are own)
