If we cut the noise and overcome our recency bias, Indian stocks have given a decent return over the past five years; though this period had been particularly eventful. We witnessed the worst pandemic in over a century crippling the world. A variety of economic and geo-political conflicts impeded the global economy. The financial markets witnessed unprecedented liquidity deluge that led to over US$20trn bonds trading at a negative yield; followed by sharp monetary tightening. The world moved from severe deflationary conditions to sharp inflationary spikes. Central banks cut the policy rates close to zero (even below zero in some cases) and then hiked the rates at the fastest speed in five decades.
In the domestic economy, we saw macro parameters like inflation, fiscal deficit, current account deficit etc. worsening sharply. We witnessed a monetary easing and tightening cycle. Banks went through a massive credit cycle.
The benchmark Nifty50 has yielded an 11.4% CAGR over the past five year (January 2018- December 2022). IT Services (19.6% CAGR) is the only sector that has meaningfully outperformed Nifty50 over the past five years. The sectors that should have theoretically benefitted from abundant liquidity and low rates like Auto (1% CAGR) and Realty (4.5% CAGR) were actually amongst the worst performers, failing even to match bank deposit returns.
The market breadth has not been great. The broader indices like Nifty 500 (10.2% CAGR) actually underperformed the benchmark Nifty50 (11.4% CAGR). In fact Nifty Next 50, that represents the set of 50 largest stocks next to Nifty50, underperformed massively with just 6.4% CAGR. Banks (11% CAGR) and Metals (11.3% CAGR), that many might think to be massive outperformers have performed just in line with the benchmark Nifty50.
If we observe only the benchmark indices, the situation appears calm and simple. However, the story beyond benchmark indices is quite revealing. For example, consider the following facts:
- Only 384 stocks (out of 1428 actively traded stocks on NSE), have outperformed the benchmark Nifty50 over the past five years.
- 54% stocks (770 out 1428) gave a positive return during the past five years, while 46% (658 out of 1428) yielded a negative return over the period of five years.
- The top 100 stocks gained 267% to 6299% during the past 5 years. These include a variety of stocks, largecap, microcap, midcap, chemicals, textile, infra builders, power, metals, FMCG, ERD services, entertainment, NBFCs, pipes, cables, industrials, pharma, etc. The list however excludes banks, top IT services, and PSUs.
- Over 270 stocks lost more than 50% of their value during these five years.
The primary idea of this analysis however is to assess two things:
1. Do we have a secular trend in the Indian equities?
2. Do we have significant pockets of froth in the markets?
The answer is:
We may have a secular trend in the Indian equities. The trend is deepening and widening of growth. A large number of sub sectors from the economy – Materials (metals, chemicals, building material, energy, textile, paper, sugar etc.); industrials; utilities (power, telecom); infra builders and owners; consumer (discretionary, durable, staples and internet); healthcare; financials (lenders, non-lenders and service providers); IT services (engineering, digital, cloud, conventional software, BPO) etc. are now participating in growth together. The market is neither sector specific nor segment (large cap, midcap etc.) This had happened briefly in the early 1990s only. This trend could actually be reflective of some structural changes in the economy per se. Of course an intensive research would be required to confirm this.
There does not appear to be froth in any pocket of the market. Though there may be cases of some individual stocks that are still in the process of normalization post the bubble burst.
The latest correction therefore could be a good opportunity to increase exposure to the Indian equities.
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