Stocks surge on reforms but challenges remain

MUMBAI: The Indian stock market has outperformed global peers in the four years since the Narendra Modi-led National Democratic Alliance (NDA) government came to power.

Between May 26, 2014 and May 23, 2018, benchmark indices Sensex and Nifty rose 38.95% and 41.73%, respectively. In contrast, MSCI India rose 32.64%, MSCI Emerging Markets 9.6% and MSCI World 24.9%.

Abundant liquidity drove the domestic markets following the centre’s demonetisation move.

“At the Nifty level, the market returns may seem unspectacular, but several stocks, especially in the small- and mid-cap space, have been multi-baggers in the four-year period,” said Pramod Gubbi, managing director and head of equities, Ambit Capital. “A large part of the rally has been driven by fund flows supported by a benign macro, resulting in a re-rating of stocks, rather than any meaningful pick-up in earnings growth. Fund flows were also helped by the financialisation of savings accelerated by demonetisation and the relative unattractiveness of real estate as an asset class.” Market capitalisation of companies listed on BSE rose to ₹145.10 lakh crore, surging 73.24% from ₹83.76 lakh crore on May 26, 2014.

According to Gautam Duggad, head of research, Motilal Oswal Institutional Equities, the markets did well, given the expectations of earnings recovery, consistent reforms and decisionmaking. Before 2014, policy paralysis and lack of meaningful reforms had been a damper. “However, disruptive and transformational reforms such as GST, RERA, IBC and demonetisation did impact the performance in the short term,” he said. “But what helped in the last four years was the consistent and steady inflows of domestic investors in mutual funds. Mid-caps have done quite well in this four-year period and are now trading at a premium to large-caps.”

Foreign investors have also been investing in equities, riding on the reforms agenda and macro stability, while domestic institutional investors (DII), including mutual funds and insurance companies, pumped in record numbers in 2017. Indian shares worth ₹40,803.55 crore were bought by DIIS, while foreign institutional investors (FII) have so far pumped in $477.23 crore into Indian equities in 2018.

Gautam Chhaochharia, head of India research, UBS, said: “The markets have done well under Narendra Modi, as investors have been impressed with the reforms agenda and efforts to improve the macro stability on inflation and fiscal front.”

On Wednesday, the Sensex closed at 34,344.91, down 306.33. The Nifty ended at 10,430.35, down 106.35 points.