Performance of Indian Equity Markets

Historical Returns
The Indian stock markets seen a record bull run in the last few years with the frontline indices, the
BSE Sensex and the Nifty 50 crossing 82,000 and 25,000 levels, respectively. The small-cap segment,
as represented by the S&P BSE SmallCap index, has shown the highest growth

The average returns for India Equity Markets (BSE SENSEX) has been around 16.65% over the last
five years

Performance of Indian Equity Markets over 5 yrs: BSE SENSEX and NIFTY 50

CAGR : 16.6 %
Comparative Analysis with Global markets
India has been one of the best performing markets in the world over the last 20 years. In the 20 years
prior to Covid, India outperformed the rest of the world, delivering an annualized 8.9% return. In
fact, it’s the only market globally that comes close to matching the U.S. over the last 20 years, even in
USD terms.

Indian Equities have outperformed in the long term.

Risk and Mitigation Strategies

Valuations

The run up in the markets in the past few months has made valuations expensive

A quick look at the valuation metrics in terms of price-earnings (PE) of the frontline indexes on the
National Stock Exchange (NSE) suggests that Nifty 50 index is trading at 24.7x, which is in line with its
5-year average, but slightly higher than the 10-year average of 23.4x,

The Nifty Midcap 100 index at 47x PE, too, is far away from its five-year average of 36.4x and 10-year
average of 32.4x, data shows.

A high PE compared to the five/ten-year averages indicates that the stock is overvalued, or the
markets expect a higher rate of growth going ahead.

Meanwhile, out of the 8 frontline sectors that includes banks, information technology (IT), metals,
real estate, public sector enterprises (PSE) and auto, five sectors are currently trading at a higher PE
multiple compared to their 10-year average
As the valuations are stretched, it would be safer invest in large-cap stocks as opposed to mid-and
small caps purely from a risk-reward scenario.

Other risk factors include geopolitics, US elections and crude price remain key risks, especially post
the recent escalation in the conflict in West Asia. Any shift in government’s fiscal priorities post state
elections,can also emerge as a medium-term risk.

Long term Investment Potential

Why are Indian Companies doing well?
Indian equities have been rising consistently over years, driven by strong earnings growth

1. Market Size:
The burgeoning middle class in India is a compelling driver of economic growth. As
millions transition from low-income to middle-income households, their
consumption patterns are transforming the country's economy. The per capita
income of India is set to double from the current $2,000 to $4,000 in 2028. By 2030,
it is estimated that India's middle class will number over 700 million people. This
demographic shift translates to increased purchasing power, greater consumption,
and heightened demand for quality products, brands and services across various
industries.

2. Improving Manufacturing Competence: Improvements in infrastructure, skilled

workforce, , lower corporate tax rates is making India an attractive destination for
domestic manufacturing

3. Technology and Increasing Digitalization: The improved digital infrastructure is

helping in increasing the productivity of companies. Startups are thriving across
the country, leveraging technology to address unique problems and create
disruptive solutions.

Factors Impacting Indian Equities

1. India’s Equity Markets are large and diversified

With a market capitalisation of $5.5 trillion, India is currently ranked fourth globally. The
three other markets ahead of us include the US stock market, which is significantly larger at
over $54 trillion, followed by China ($10 trillion), and Japan ($6.2 trillion).

India is expected to emerge as the third-largest economy by 2027, and according to various
estimates, the market cap will likely hit $10 trillion by 2030.

India’s equity markets are also well-diversified across sectors and company types that
potentially offer an elevated growth outlook and opportunities driven by domestic
consumption and emerging industrial prowess. Financials hold the largest share, followed by
significant consumer discretionary, industrial, energy and technology weightings. The market
also offers good exposure to consumer staples, utilities and health care names.

2. Strong GDP Growth

India is forecasted to be the fastest growing economy in the world. Forecasted GDP growth is
6.5% in 2024

3. Strong liquidity

The market rally in the past few months, including the mid-and small-cap segments, analysts
believe, has been on the back of strong inflow from the domestic institutional investors
(DIIs).

4. Low corelation compared to other markets

India’s stock markets have traditionally exhibited a low correlation to other major stock
markets. Not only is India moderately correlated with developed markets (0.59 with Europe,
0.54 with USA, 0.49 with Japan), its stock markets are equally lowly or even less correlated
with many constituents of the MSCI Emerging Markets (0.57 with Korea, 0.44 with China). An
increased allocation to Indian equities for a global or emerging markets portfolio may, all
things being equal, enhance its risk/return profile.
 5. Labor

India’s labor force underpins exciting prospects for manufacturing growth. This labor supply
is a key input into the ongoing manufacturing boom, and is attractive to companies
establishing manufacturing capacity in India. Continued growth in manufacturing can power
the economy by lifting millions into higher value-added jobs, eventually also boosting
domestic consumption.

Impact of Fed Rate Cut on Indian Equity

US Fed rate cut: The recent downward revision of US jobs data, along with the minutes from the
latest FOMC (Federal Open Market Committee) meeting, has strengthened expectations of a rate cut
in September. Many experts are certain that the Fed will cut benchmark interest rates within the next
few weeks. The next US FOMC meeting is scheduled for September 17-18.. Some experts expect the
Fed to cut rates by 50 bps in September, while some say the Fed will cut rates by 25 bps in each of its
next three policy meetings scheduled in September, November and December.

Overall, the rate cuts will be welcomed positively by the Indian market because the RBI is following
the US Federal Reserve's lead when it comes to interest rates.Their announcements will spur
additional rate cuts in India, which will enhance liquidity, attract capital inflows, and strengthen the
value of the rupee.

A Fed rate reduction will result in a weaker US dollar, increased liquidity, cheaper borrowing costs,
etc. Given these factors, Indian sectors that might benefit from a Fed rate cut are IT, BFSI, auto, and
realty.

Impacts of Fed Rate cuts:

 Increased Foreign Investment: When the interest rates were high in the US, the US investors
preferred to keep money in the US as they were getting higher returns on safe US Treasury
securities. With the upcoming rate cut by the Fed, the US Treasury securities yield will
 reduce. As a result, investors will explore emerging markets like India for investment with
higher returns. This can lead to an inflow of foreign capital into Indian equities and debt
markets. As more foreign institutional investors (FIIs) and foreign portfolio investors (FPIs)
invest in Indian markets, the demand for Indian stocks and bonds can increase, potentially
driving up prices.

 Some sectors to benefit directly: Stocks from sectors like Information Technology (IT) will
directly benefit from rate cuts. If the Federal Reserve begins cutting rates, borrowing costs in
the US will decrease. It could encourage large corporations to expand their IT budgets,
potentially boosting order volumes for Indian IT firms.

 Impact on the Indian Rupee: With an increase in foreign investments, there is often a higher
demand for the Indian Rupee as investors convert their foreign currency into INR to invest in
Indian markets. It can lead to an appreciation of the rupee against the US dollar.

 Bond Market Rally: Lower interest rates globally and in India can lead to a rally in the Indian
bond market as the yield on existing bonds becomes more attractive relative to new issues.
This can reduce borrowing costs for the government and corporations, potentially leading to
more capital investments and economic growth.