Indian Stocks: Rationalize All the Enthusiasm

 Indian Stocks: Rationalize All the Enthusiasm

Our stock indices have outperformed many others in the past one year. Still, as challenges arise in Samvat 2079, we cannot rely on the fall in local stock prices from global factors.

As Samvat 2078 comes to an end, taking a look at how the Indian stock markets have performed may leave investors disappointed. Broadly speaking, due to the change in our benchmark stock index in this traditional accounting year, we have been poor by about 1% to 2%. This has been our worst performance in seven years (as most of the returns have been either double or high single digits). Still, we can get comfort by comparing with other markets. During the same period, most major stock indices have underperformed as monetary conditions tightened and recession concerns gripped the US and Europe while China's Covid-hit economy slowed to a crawl. Investors have lost a lot of money in these markets, so we in India can consider ourselves lucky that we have preserved much of our capital in a year that saw the outbreak of the pandemic but a war broke out.

Curiously, Indian equities have held up relatively well despite several other adverse factors. The price-earnings ratio of the country's main index has now deflated from a bloated figure of over 30 in its early 20s, but is still well above the high teen levels that are considered sustainable over the long run. Profit growth, primarily driven by cost-cutting during the pandemic crisis, may, if demand does not pick up soon. The cost of capital is rising both in the West and in India, and Foreign Institutional Investors (FIIs), whose actions have long determined the direction of our exchanges, are in sell-off mode. So far in 2022, they have shed around 1.8 trillion worth of Indian equity holdings. In the past, such huge sales have caused major declines. But strong domestic buying has supported local stocks this time, with momentum drawn from the post-Covid retail rush for stocks. New demat accounts saw a spurt, even as mutual funds launched wide netting campaigns to pull household savings into stocks. The indices were partially pushed by the availability of cheap credit across the world. As an extraordinary expansion of wealth began to halve through Samvat 2078, however, the question remains whether our equity markets have 'decoupled' from other major exchanges.

To the extent that Indian indices depend less on inflows from abroad than before, a sort of disintegration is visible. It can also be associated with better readings of economic growth. However, we should not shy away from a sense of isolation from the global tide of liquidity. Not only does India's structural vulnerability to such forces remain the same, our COVID defense echoed that of the West. While our stimulus was short, it put equal pressure on us. With deposit rates in particular and secured loans in general now paying slightly higher as monetary policy has tightened, further rate hikes could turn their real returns positive and make the debt return to savers' money. to compete with equity. While banks that need money to keep up with credit growth – which is much higher than deposits – have begun to increase their payments, more growth will be needed. Equity risk appetite may fade as we move forward. It could even disappear in a flash, if the world economy takes a turn worse than the price. After a mega-dose of injections for COVID relief, policy reversal is a risky path, with the worst-case scenario of global stagflation that could emerge. There may also be unexpected costs imposed by geopolitical divisions. While India's economic growth is a bright spot, even a reason to rejoice, let's take a sober look at the prospects of Samvat 2079. This will help the equity investors to celebrate the mood consistently.