The highlight of equity market performance in 2023, so far, is India’s underperformance. As on 17th February, Nifty is down 1.3 percent YTD. Most other markets – Developed and Emerging – have outperformed. S&P 500 is up 6.7 percent, Euro Stoxx 50 is up by 10.3 percent, Hang Seng, Kospi, and Shanghai composite are up by 3.7 percent, 1.09 percent and 5.6 percent respectively YTD. The important questions are:
Why this underperformance by India? Where do we go from here?
The single most important reason for India’s underperformance is the sustained selling by FIIs in the cash market. In 2023, till 17th February, FIIs sold stocks for above Rs. 50,000 crores in the cash market and moved money to cheaper markets like China, Hong Kong and South Korea. The opening up of the Chinese economy after the Covid lockdown and the improving prospects there, coupled with very low valuations, have played an important role in the massive capital flows to China. Cheaper markets like Hong Kong and South Korea also have attracted lot of FII investment. This shift of FII investment to these markets have been at the expense of India, where valuations are relatively expensive.
Retail investor growth slowing down
Retail investor accounts continue to grow; but the growth has slowed down. Total demat accounts exploded from 4.09 crores in February 2020 to 10 crores in August 2021. Since then, the rate of increase has slowed down and currently the total number of demat accounts stand at 10. 6 crores.
The healthiest trend in equity investing in India is the impressive growth in the AUM of the mutual fund industry and more importantly, the monthly SIPs crossing Rs.13,000 crores. Mutual fund AUMs witnessed 5-fold increase in 10 years from Rs. 7.93 trillion in November 2012 to Rs. 40.73 trillion in November 2022. The potential for growth of mutual funds is huge.
Recency bias in retail investing
Retail investors are, more often than not, influenced by recent events. This is more so in the case of the newbie retail investors. The rare one-way market movement which took the Nifty from the low of 7,511 in March 2020 to 18,604 in October 2021 was a period of easy money making and this attracted lot of new investors to the market. The impressive performance of India’s corporate earnings and the loose monetary policy (low interest rates) implemented by the RBI also played an important role in sustaining the bull market and attracting hordes of new investors into the market.
Volatile market and modest returns expectations in 2023
A raging bull market is not the right environment to invest for the long-term. History tells us that bear phase is followed by a bull phase and systematic investment during a bear phase leads to excellent returns in the bull phase that follows. This year, the market will continue to be highly volatile mainly responding to news about US economic growth, Fed’s policy, bond yields and trends in the dollar index. US economy is slowing down responding to the hawkish Fed policy. But there is no clarity on whether the US economy will slip into a recession and, if so, whether that recession would be shallow and short or deep and prolonged. As clarity emerges on this, the market will respond. But till then, the market will remain excessively volatile. This global volatility will impact Indian market, too.
Accumulate on market dips
The market is unlikely to rally into a new bull orbit soon. India’s GDP growth is expected to slow down to below 6.5 percent in FY24. Corporate earnings, too, will be under pressure from rising interest costs. So, the combination of headwinds from the mother market US and challenging economic environment in India will keep the markets volatile. Investors should use this period of volatility to accumulate high quality stocks particularly those with high growth potential.
The India Growth story is gaining currency
The India growth story is widely recognised and appreciated now than ever before. Since 1992, India has been the second fastest growing large economy in the world, behind China. Now, China is slowing down, and India has emerged as the fastest growing large economy. India has the best runway for sustained growth for many years to come and can be an $8 trillion economy with a market cap of around $10 trillion by 2012. In brief, the next 10 years may turn out to be the golden period for economic growth and investing in India. This should be the overarching theme that guides investors in their investment journey.
India growth story