Why the bull runs (GS Paper 3, Economy)
Introduction
- It’s indicative of the changes in the Indian economy: The number of stock market investors is now inching closer to the number of land-owning farmers in the country.
- The global uncertainties are also not affecting the bullish nature of India's stock market.
Performance of the Indian Stock Exchange
- In April, the BSE Sensex traded at a price-to-earnings (PE) ratio of 25.
- In comparison, the PE ratio averaged 18.61 between 2003-04 and 2007-08 and 23.81 between 2014-15 and 2023-24.
- In the case of the small- and mid-cap segments, the exuberance has been even more euphoric.
- While both small- and mid-cap indices did witness a steep fall following concerns over “froth” in certain segments, and the possibility of price manipulation, they have recovered since.
- This despite the fact that several small- and mid-cap funds had restricted fresh inflows, indicating their inability to allocate funds efficiently, which suggests that stock prices may not be anchored in fundamentals.
Indian economy’s compelling narrative
- This exuberance, rational or irrational, is backed by an appealing narrative with several cross-cutting themes.
- At its core is a belief in India’s growth trajectory — the view that the political, policy and economic environment are perfectly aligned to deliver relatively high growth over a sustained period is now widely held.
- There are, after all, strong reasons to be optimistic about the economy’s prospects.
- A growth rate of 7-8 per cent — notwithstanding uncomfortable questions over its estimation, the distribution of growth or job creation — is nothing to scoff at.
- Strong corporate and bank balance sheets have only raised expectations that the economy is on the cusp of a private investment cycle.
- And then there are favourable demographics.
Both foreign and domestic investors are enthusiastic to invest
- It’s not just the foreign investors who have been pouring in money, enthused about the economy’s prospects.
- Indian households, too, have been increasingly turning towards the stock markets in their search for yield.
- As per reports, the total number of demat accounts in the country has recently crossed 150 million.
- As per NSE, the number of unique investors (based on PAN) now exceeds 90 million, which translates to upwards of 50 million families, or more than 17 per cent of all households in the country.
- And then there are those who invest indirectly via mutual funds.
- As per the Association of Mutual Funds in India’s estimates, there are now more than 40 million unique mutual fund investors (there will obviously be some overlap).
The numbers, in perspective
- To put these numbers in perspective, consider the following statistics.
- In 2019, the total number of agricultural households in the country was pegged at 93.09 million by a survey carried out by the National Statistical Office.
- In 2022-23, the number of farmer beneficiaries under PM-Kisan stood at 107.3 million, while in 2023-24, it was 92.1 million (as of January 2024).
- In 2022-23, 74 million persons filed income tax returns (this includes individuals, firms, etc).
- And, as per the National Family Health Survey, 7.5 per cent of households in the country have cars.
The investors are from diverse PIN codes in India
- Investors now are not just limited to the larger cities.
- In 2023, an SBI dividend yield fund drew applications from 70 per cent of the pin codes in the country.
- As per other estimates, investors now come from every nine out of 10 pin codes in the country.
- In 2016-17, contributions through systematic investment plans (SIPs) stood at Rs 43,921 crore.
- By 2023-24, they had risen more than four-and-a half times to touch Rs 1.99 lakh crore.
- In comparison, net investments by foreign portfolio investors last year stood at Rs 2.08 lakh crore.
Why do investors trust India?
- Some are now expecting a period of digesting the extraordinary gains that the markets have witnessed.
- But, a continuing surge in domestic flows could help maintain current valuations.
- Investors, though, are not showing any signs of nervousness — the India VIX, a fear gauge, witnessed a steep fall last Tuesday, and remains well below recent highs.
- Investors, though, especially the foreign ones, can be a fickle lot.
- As per a recent report, some funds are undoing their “buy India, sell China” strategy as Beijing’s support for the economy and depressed valuations prompt a rethink.
- On balance, however, India remains the preferred investment destination.
- After all, it does seem to offer a more compelling story.
Conclusion
At a time when there is uncertainty over China’s growth prospects, the Indian economy stands out. It remains a preferred investment destination.
