Indian markets have so far handled the global upheavals better than US markets, but there’s no room for complacency
It’s an old market adage that the Indian stock market catches flu every time the US market sneezes. But the ongoing market correction has defied this adage, so far. Losing 23 per cent from its peak value in early January, the US S&P 500 index is well into official bear market territory. But despite Foreign Portfolio Investors (FPIs) keeping up a relentless barrage of selling, Indian indices have lost just 16 per cent from their October peak and 12 per cent year-to-date. Three factors explain why Indian stocks have been relatively resilient to this bout of global upheaval. Amidst talk of a recession in the US, the Indian economy is still projected to grow at 7-7.5 per cent this fiscal with nominal growth in the mid-teens. After registering anaemic earnings growth earlier, Indian companies have shown strong profit expansion in the last couple of years, with Nifty50 earnings expanding nearly 75 per cent between FY19 and FY22. Most important, while FPIs have pulled out a record $32 billion since October 2021, sustained buying by domestic institutions — powered by retail flows — has cushioned Indian stocks from a free fall. But this relatively resilient show is not cause for complacency, as the tide can swiftly turn.
For one, India’s growth outlook and employment prospects could take a hit if a US recession or risk-off phase triggers a reversal in long-term capital flows into Indian enterprises. The tech-enabled start-up sector, which registered scorching growth rates during Covid and is a large employment generator, is already showing signs of a shake-out with slowing PE/VC flows. Two, increases in industrial input prices and recent rate hikes are yet to show up in corporate earnings. Three, there’s evidence that the sharp bump-up in the financial savings of Indian households over the last three years, which bolstered equity flows, was triggered by a flight to safety and a lack of spending avenues during Covid. As Covid fears wane and discretionary spending normalises, these flows could moderate. The sharp rise in bond yields in recent months even as the equity markets have turned turbulent, also argues for a re-alloaction of retail money from equities to bonds. A majority of young investors who have thronged to mutual fund SIPs, curated portfolios and direct stock bets in recent times haven’t experienced a truly vicious bear market in their investing journey. Their ability to stay the course with equities will be tested as this bear phase extends and their portfolios sink into the red. With over a half of existing demat accounts and a third of mutual fund SIPs added in the last three years alone, a significant chunk of the current domestic flows into equities are exposed to this risk.
Having hard-sold equity products to new investors in the last three years, it falls to mutual fund and fintech players to ensure that investors re-adjust their return expectations to the new normal of high rates and scarce liquidity. The Securities and Exchange Board of India on its part, must ensure that the current market fall, if it deepens, remains orderly with smoothly functioning payment and settlement systems.