Are Indian Markets Disconnected from the Indian Economy?

At 4.5% India’s GDP grew at the slowest pace in the last 6 years in Q2FY20. While this might have sparked off debates among scholars, politicians and economists alike, stock market investors seem to be least bothered.

What makes us believe that?

Giving two hoots to the macro-economic data some front line stocks are partying at Dalal Street. Companies such as Reliance, ICICI Bank HDFC Bank and HUL are hovering around their all-time highs—at a time when the Indian economy is gasping for fresh air in the form of reform impetus.

Doesn’t it sound odd that when the unemployment data and GDP data are utterly distressful, India’s largest conglomerate (measured by market cap) surmounts the psychological mark of Rs 10 lakh crore in market cap?

True, equity markets are forward looking but when only a handful companies dominate the show it paints a different picture.

What could be the reason(s) for such disconnect?

1. Perhaps, whenever growth returns, the market may be expecting these companies to benefit disproportionately.

2. Or it could also mean, the economic slowdown is likely to knock off smaller companies so badly that Index heavyweights are going to gain market share in their respective industries—quite evident in the telecom, banking and the consumer stables, at least.

3. In the wake of a huge trust deficit, investors are living with due to scams, malpractices and other lacunas in the corporate governance of a number Indian companies, smart investors might be sticking only to quality and companies with clear track records. Withing this scenario, is there really a bubble in quality—as questioned by a few renowned voices in the industry?

If you look at the market cap of Nifty constituents vis-à-vis India’s nominal GDP, you will realize why some front line stocks feature in almost all portfolios managed by institutional investors.The Market Cap of Nifty 50 companies equals 44% of India’s nominal GDP

No brainier portfolio of the top-10 Nifty constituents?

(Source: MOSPI, Ace Equity)

Note: Market caps of stocks in the table are as on 6 December 2019;Nominal GDP in Q2FY20 annualized to calculate the market cap of above companies as a % of GDP

Stocks above aren’t recommendations.

What are the key takeaways?

It’s unlikely that investors taking passive exposure to markets through well-managed large cap and multi cap mutual funds or diversified Portfolio Management Services have lost badly over the last 2 years. It is active individual investors, dealing in stock markets on their own, who perhaps have. Therefore, many investors nowadays prefer to let professionals handle their money. It goes without saying, even once the funds are handed over to a professional for investment, their performance must be tracked regularly.

You shouldn’t ignore well-known large cap companies just because they are so big that it raises doubts in your mind as to how much bigger they can become here on. Some top banks featuring in the above list have become multi-baggers despite being huge in size (in relation to other companies available) even 15-20 years ago.

Bottom line:If markets are smarter than all independent investors,shouldn’t you listen to them more often than you challenge them?

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Disclaimer:

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.