Globally, stock markets are correlated. Globalization and increasing economic integration have led to a higher correlation over time. The correlation is high during market booms and crashes. However, there are times when some countries outperform, and some underperform. There have been short periods of certain markets decoupling from the rest.
India’s underperformance during the last one year, from September 2024 to September 2025, has been rare and big. The one-year return from Nifty, as on 19th September, was -2.6 percent. In sharp contrast, the one-year returns during this period from other major markets were impressive at 16 percent for S&P 500, 13 percent for Stoxx 50, 18.73 percent for Nikkei, 45.48 percent for Hang Seng, 32.41 percent for Kospi and 14.78 percent for Taiex. India has hugely underperformed.
The relevant questions are:
Why is India underperforming?
What are the factors driving this underperformance?
When will the market start rallying, compensating for this underperformance?
Let us get the issue in perspective.
Globally, stock markets crashed with the outbreak of Covid-19. The recovery was quick and sharp. Importantly, work from home and online trading facilitated active retail investor participation. The one-way movement in the market during a significant phase of the rally after the Covid crash emboldened retail investors to buy every dip. The explosive growth in the number of demat accounts – from 40.9 million in April 2020 to above 200 million now – and the sustained capital flows through mutual funds imparted great resilience to the market. Investment decisions, particularly in the mid and small-cap space even became price agnostic. Valuations, particularly in the broader market, stretched.
Market history tells us that markets overreact: both on the upside and on the downside. Market history also tells us that when valuations spike up or down excessively, they revert to the long-term average. This ‘reversion to the mean’ is inevitable. When valuations get stretched due to irrational exuberance, market corrections happen. Sometimes it will take the form of price correction; sometimes it will be time correction.
During the boom phase after the Covid crash, India has been one of the best performing markets. The impressive earnings growth during 2021-2024 gave fundamental support to the rally which took the Nifty from 7511 in March 2020 to 26277 in September 2024. This fundamental support was lost when corporate earnings growth declined to a paltry 5 percent in FY2025. Sustained FII selling, mainly in response to higher valuations in India and lower valuations elsewhere, contributed significantly to India’s underperformance. In fact, in the absence of sustained fund flows through the DIIs, the market correction would have been steeper.
As Benjamin Graham famously said, “In the long run, the market is a slave of earnings.” When the earnings improve, the market will catch up. Actually, the market will anticipate and discount the earnings growth earlier. Now, it appears that India is on the cusp of an earnings recovery. In FY25, earnings growth will be moderate, in the range of 8 to 10 percent. But the stimulus that has been given to the economy – the big income tax cuts through the 2025 Budget, the 100 bp rate cut by the MPC and the game changing GST reforms – has the potential to deliver about 15 percent earnings growth in FY27. The market will soon start discounting this earnings recovery. Investors should continue to invest systematically in high quality stocks and through mutual funds. Another important takeaway from the huge variation in performance across geographies is the need to diversify investment across geographies.
