The Rally in India’s stock market with the Sensex scaling a new peak of 75,000 is truly remarkable. The move to a market capitalisation of over `400 trillion or close to $5 trillion has, in the past couple of years, been fuelled largely by domestic liquidity. Investors, a good chunk of them in the younger age groups, are looking for better returns. The current demat monthly addition run rate is over 3 million and total demat accounts have exploded from 40 million in March 2020 to 150 million today. Foreign portfolio investors (FPIs) too snapped up stocks worth $20 billion in 2023 as allocations to India have been raised in the absence of a rebound in China. Once the interest rate cycle turns decisively, as is expected by the end of 2024, one should expect bigger allocations to equities as an asset class. The average inflows of an annualised `2 trillion into Systematic Investment Plans (SIP) could also go up significantly. How attractive stocks are as an asset class can be gauged from the fact that equities as a share of net household financial assets went up to as much as 14.7% in FY23 from just 4.5% in FY21.
The most significant aspect of the rally has been its breadth, with stocks of all hues — large cap and mid cap — running up. There seems to be little concern over the rich valuations even after the regulator saw froth in some segments. While it is true that the Indian market is getting re-rated, and justifiably so, given the performance of its economy and the corporate sector, valuations are indeed expensive for some sets of stocks. But a large set of investors seem willing to wait it out and are convinced that valuations of 60x or 70x are well-deserved.
The optimism stems from India’s strong growth story and the prospects of political stability. Without doubt, the economy has weathered both the pandemic and the Russia-Ukraine war much better than expected and seems to be coping well with the Israel-Hamas hostilities. The balance of payments (BoP) position is far more healthy today than it has been in many decades. Following an average growth of about 5.8% in the last 10 years, India is currently growing at around at a brisk 7%.
Also Read E-commerce needs a bulwark Bumps on the road: New BoT terms for highway construction may throw pvt investors into risk-aversion mode The Curious Case of Copper Beyond PLI targets To be sure, the headline GDP numbers mask many weaknesses, the biggest being the anaemic growth in private consumption which inched up to 3.5% y-o-y in Q3FY24 from an even slower 2.4% y-o-y in Q2. Moreover, the rural economy isn’t recovering fast enough to support consumption. Again, much has been made of the strong investments, but while the gross fixed capital formation grew at a good 10.6% y-o-y in Q3, it came off a weak base. Private capex remains at levels that are lower than is needed to propel the economy to a sustainable growth of 7%.
If investors are shrugging off these concerns, it is because one section of corporate India has been doing exceedingly well. Other businesses might not be as exciting but are tipped to benefit from the economic growth in general. This explains the high earnings multiples that many companies command. At a market cap to GDP ratio of around 1.2x, India is not yet overvalued relative to much bigger markets that that of US. A ratio of 1.5x would signal a full re-rating.
The Rally in India’s stock market with the Sensex scaling a new peak of 75,000 is truly remarkable. The move to a market capitalisation of over `400 trillion or close to $5 trillion has, in the past couple of years, been fuelled largely by domestic liquidity. Investors, a good chunk of them in the younger age groups, are looking for better returns. The current demat monthly addition run rate is over 3 million and total demat accounts have exploded from 40 million in March 2020 to 150 million today. Foreign portfolio investors (FPIs) too snapped up stocks worth $20 billion in 2023 as allocations to India have been raised in the absence of a rebound in China. Once the interest rate cycle turns decisively, as is expected by the end of 2024, one should expect bigger allocations to equities as an asset class. The average inflows of an annualised `2 trillion into Systematic Investment Plans (SIP) could also go up significantly. How attractive stocks are as an asset class can be gauged from the fact that equities as a share of net household financial assets went up to as much as 14.7% in FY23 from just 4.5% in FY21.
The most significant aspect of the rally has been its breadth, with stocks of all hues — large cap and mid cap — running up. There seems to be little concern over the rich valuations even after the regulator saw froth in some segments. While it is true that the Indian market is getting re-rated, and justifiably so, given the performance of its economy and the corporate sector, valuations are indeed expensive for some sets of stocks. But a large set of investors seem willing to wait it out and are convinced that valuations of 60x or 70x are well-deserved.
The optimism stems from India’s strong growth story and the prospects of political stability. Without doubt, the economy has weathered both the pandemic and the Russia-Ukraine war much better than expected and seems to be coping well with the Israel-Hamas hostilities. The balance of payments (BoP) position is far more healthy today than it has been in many decades. Following an average growth of about 5.8% in the last 10 years, India is currently growing at around at a brisk 7%.
To be sure, the headline GDP numbers mask many weaknesses, the biggest being the anaemic growth in private consumption which inched up to 3.5% y-o-y in Q3FY24 from an even slower 2.4% y-o-y in Q2. Moreover, the rural economy isn’t recovering fast enough to support consumption. Again, much has been made of the strong investments, but while the gross fixed capital formation grew at a good 10.6% y-o-y in Q3, it came off a weak base. Private capex remains at levels that are lower than is needed to propel the economy to a sustainable growth of 7%.
If investors are shrugging off these concerns, it is because one section of corporate India has been doing exceedingly well. Other businesses might not be as exciting but are tipped to benefit from the economic growth in general. This explains the high earnings multiples that many companies command. At a market cap to GDP ratio of around 1.2x, India is not yet overvalued relative to much bigger markets that that of US. A ratio of 1.5x would signal a full re-rating.
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Sensex@75K: Equities as a share of net household financial assets have zoomed to 14.7% in FY23 from just 4.5% in FY21
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1
11.04.2024
The Rally in India’s stock market with the Sensex scaling a new peak of 75,000 is truly remarkable. The move to a market capitalisation of over `400 trillion or close to $5 trillion has, in the past couple of years, been fuelled largely by domestic liquidity. Investors, a good chunk of them in the younger age groups, are looking for better returns. The current demat monthly addition run rate is over 3 million and total demat accounts have exploded from 40 million in March 2020 to 150 million today. Foreign portfolio investors (FPIs) too snapped up stocks worth $20 billion in 2023 as allocations to India have been raised in the absence of a rebound in China. Once the interest rate cycle turns decisively, as is expected by the end of 2024, one should expect bigger allocations to equities as an asset class. The average inflows of an annualised `2 trillion into Systematic Investment Plans (SIP) could also go up significantly. How attractive stocks are as an asset class can be gauged from the fact that equities as a share of net household financial assets went up to as much as 14.7% in FY23 from just 4.5% in FY21.
The most significant aspect of the rally has been its breadth, with stocks of all hues — large cap and mid cap — running up. There seems to be little concern over the rich valuations even after the regulator saw froth in some segments. While it is true that the Indian market is getting re-rated, and justifiably so, given the performance of its economy and the corporate sector, valuations are indeed expensive for some sets of stocks. But a large set of investors seem willing to wait it out and are convinced that valuations of 60x or 70x are well-deserved.
The optimism stems from........
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