earnings versus a 20-year average of 20.4x (at the 88th percentile). So, what has been driving the markets and more importantly, what’s next? The superior returns were triggered by a stable macroeconomic profile, improving corporate profitability as well as strong liquidity. On the macro side, fiscal consolidation, a focus on capital spends and moderating inflation have boded well for India. The recent GDP growth print of 8.2% was also a positive surprise for market participants.
From a corporate profitability point of view, from FY18’s low of 1.3%, India’s corporate profits as % of GDP have dramatically improved to 5.5% in FY23. Liquidity has been strong too, providing a cushion to the markets. In 2023, FIIs bought $21.4 billion, while domestic institutions bought $22.3 billion. The vast improvement seen in systematic investments into mutual funds is particularly heartening. SIPs —which stood at Rs 8,500 crore in FY20 — amounted to Rs 20,900 crore in May of 2024. Even as these numbers explain what has happened in recent years, the question still remains: what now? And what next?
Equity market returns are a function of three factors: Fundamentals, valuations and sentiments.
On corporate fundamentals, India is anchored by a strong combination of macro stability and improving corporate profitability. Key macro data points like electricity generation, bank credit, GST collections and steel consumption continue to point towards a healthy business cycle. Our reading point towards a recovery in the rural sector.