The Nifty now trades at around 18.5 times estimated one-year forward earnings relative to the historic average of 16 times.
This newspaper has drawn attention to the widening chasm between the performances of the economy over the past year or so and how the rally in the Indian stock market has been very narrow. About ten stocks—banks and IT firms—have done exceedingly well, driving up the benchmark indices to new highs while 80% of the market has languished. In fact, the benchmarks too would have disappointed investors had the government not slashed the corporation tax rate; the entire gain of 12% made by the Nifty in 2019 came only after the cut in September. This is despite the fact that foreign investors invested a chunky $14 billion in Indian equities in 2019, after selling $4 billion worth in 2018.
While their investments last year were based on abundant liquidity and high hopes, the picture is somewhat different today. While central banks around the globe will probably remain accommodative since most economies are weak, it is not clear how much of the fund allocation to emerging markets will come India’s way since it is one of the most expensive markets in the world. The Nifty now trades at around 18.5 times estimated one-year forward earnings relative to the historic average of 16 times. Foreign flows into India, therefore, could be a lot more modest this year.
Also, since growth expectations today are way more tempered than they were even three months ago—real GVA in 2020-21 is expected to come in at 5.4% versus an estimated 4.5% in 2019-20—the growth in corporate earnings cannot be spectacular except for a handful of companies;indeed, there hasn’t been a season in the last two years when earnings estimates haven’t been downgraded. Since the economy is seen to be hobbled by several structural problems, and not only a few cyclical ones, it cannot be revived merely through fiscal or monetary stimulus.
Consequently, the slowdown is expected to linger on for much longer than anticipated earlier. This suggests that the broader market could continue to turn in a very mediocre performance through 2020 though most stocks today may be valued lower than they have been historically.
This is, of course, bad news for small investors, many of whom park their savings in mutual fund schemes; the data shows that returns from SIPs too have not been very good especially where fund managers invested in mid-cap and small-cap companies. Amazingly, for an economy of India’s size, the total equity assets with mutual funds are just under Rs 8 lakh crore having risen from Rs 1.75 lakh crore in December 2009; the Sensex delivered a return of 9.10% in the last 10 years.
Inflows into equity schemes have been falling sharply—the inflow in November was only Rs 1,312 crore in November, 2019, the lowest in the past 41 months compared with average net inflows into equity schemes in the last three and a half years was Rs 9,578 crore. With the savings of households growing at a much slower pace, such investments too could slow. That then would be a further setback for the markets.