It’s been a long journey for the Indian stock market. It has been growing well, generating superior wealth in the ongoing century. The Nifty 500, the broader equity index, has provided a decent CAGR of 13.6% over about 23 years. A one-time investment of ₹1 lakh in December 2000 would have been ₹21 lakh today. From the latest intra high of 17,754.05, dated September 12, it went down by 7.25% on October 26, and on November 3, Nifty 50 closed at 17,000.95, which is 4.25% lower. A short-term break in the long-term growing market.
At the onset of the 21st century, the big picture for India was as a rising emerging market as the domestic economy had opened for world business. Initially, the focus was on infrastructure development, particularly in the areas of roads, power and realty, seen as basis fundamental to the new economy. However, it was often characterized as an elephant economy, substantial and steady, driven mainly by domestic demand, and not swiftly adapting to global opportunities. This placid perception has since shifted in the present decade, with the economy now recognized as a burgeoning force poised to become a global supply hub in the future. The multiplier effect is seen in varied sectors like Digital, Renewables, Electronics, Technology, Pharma to Chemical, while efficient working of government expenditure is also uplifting rural and domestic demand.
The Indian economy & fiscal situation are as strong as they have ever been. Projections indicate a stable 6.5% YoY GDP growth from FY24 to FY26, alongside a 5.25% fiscal deficit, even amid global economic deceleration. H1FY24 corporate earnings growth has been bumper, with PAT growth of top 100 large cap estimates at 35% YoY. While no intrinsic structural issues have been identified within India, global circumstances have instigated fluctuations in the stock market, leading to currency volatility. INR has depreciated against USD, 83.270 Friday closing from 82.140 at March-end.
The recent decline in the Indian stock market is predominantly driven by global factors. Notably, there is a conspicuous deceleration in the global economy, as evidenced by Europe’s recession, with Germany, the region’s foremost manufacturing hub, recording negative GDP growth for the past three quarters. In Asia, the engine growth of China is decelerating. Annual taker of 7% GDP growth, during pre-covid is forecast to settle to 4.5% in the future. It is leading the government to consider implementing a significant stimulus package to regain traction.
Amid a contracting global landscape, two nations, the US and India, are decoupling. In 2022, the US was projected to enter a recession in the latter part of 2023, however, it managed to avert this scenario through the implementation of a comprehensive $8 trillion COVID assistance package, along with fiscal and monetary stimulus measures introduced by the government between 2020 and 2023. These initiatives had far-reaching benefits, extending support to households, states, healthcare, businesses, and other institutions. Consequently, the likelihood of a recession has now significantly diminished. However, a slowdown is forecast, the annual GDP growth is estimated to reduce from 2.3% in CY23 to 1% in CY24 due to high fiscal deficit, interest rate and quantitative tightening by the US FED.
This is the primary issue of the global stock market, and the fallout of the world economy. The current global economic landscape stands in contrast to the elevated trajectory of the Indian stock market. It is becoming a challenge to hold the gains due to high FIIs selling in the last 3-4months. Even the optimistic H1 results are not supporting the market to sustain the momentum strong.
Despite long-standing imbalances in the economy, including high inflation, elevated bond yields, geopolitical tensions, and supply constraints, the Indian stock market, like the main indices, has maintained a high valuation. For example, the MSCI India Index has been trading at an average one-year forward P/E of 20.5x above the long-term of 18x. Today at 19.6x, a dichotomy in context to dollar terms with elevated bond yield trading at decades high of 5%. FIIs are cautious as interest rates are expected to stay high, in-stroke to the hawkish central bank view, and economic slowdown and moderation in future earnings are warranting a consolidation in prices and valuations.
First published in Mint