India is crazy about stocks

If the topic of the stock market as an investment option comes up in a conversation with an older Indian, one quickly notices a certain skepticism, a reticence to consider it a top investment option. That perception was likely borne in yesteryears, when the Indian stock market was akin to the Wild West, with few stocks, little liquidity and not only high volatility but often manipulated volatility. Considering that, people simply preferred fixed deposits and real estate as primary investment options for their savings. Oh my, how things have changed.

This week, the older of the two Indian stock indices, the Sensex, reached 80,000 points. Only four years ago, pre-Covid, it was hovering around 40,000. In 2010, it was moving at around 10,000 points. So, for example, while the market value of Italian companies (FTSE) only doubled since 2010 until now, the value of Indian companies went 8X.

And three big factors are contributing to the skyrocketing growth. The first one are the institutional funds around the world, who seemed to just have “discovered” India. They have found that they can make above-average returns without a lot of effort, thanks to the booming economy. They can also find the risk more acceptable, thanks to the increased regulations, control and transparency from the Indian government. And there has been a substitution effect, as their traditional options in Asia and the rest of the world have underperformed. The 5-year returns from India are only matched by Taiwan, while hugely over-performing other economies like Indonesia, Korea and, of course, China.

The second factor are the Indian mutual funds. The word SIP (Systematic Investment Plan) has become part of the vocabulary of any individual or family with some savings. SIP is simply a popular way to stagger the investment in a mutual fund to avoid the risk of lump-sum investments. It is a commitment on the investor’s part to regularly add a partial sum to his/her fund. Needless to say, most of those SIPs nowadays are going into equity-heavy mutual funds. How much is this effect? Well, mutual funds now account for 60% of the total domestic capital inflows, having gone 5X in size in the past ten years. And from 2017 to 2023, the total investment in SIPs from individual investors more than tripled (data from Blume Ventures). I mentioned before the skepticism about the stock market that older investors seem to hold. Well, it’s a new generation and stocks have become the most popular place to put savings. It does help that the real estate market in large cities seems completely bubbled up leaving equity as the only option to get that above-10% return.

The final driving factor is the Indian retail investor. Covid lockdowns and low-cost and easy-to-use investment platforms like Zerodha, Groww or Paytm Money created the perfect storm for individuals to discover direct investments in the stock market. From 2020 to 2023, the number of individuals who did at least one trade went from 8 million to 25 million. This was also fueled by the availability and visibility of companies to invest in. The past years have seen many start-ups with high recognition amongst the affluent population (Paytm, Nykaa, Zomato, Mamaearth, etc) launching their IPOs and creating a huge scramble for shares. Basically, we have gone from an economy that generates five to ten IPOs per year to one with more than 50 per year. Right now, a retail investor wakes up every day with news of company success stories, industries with attractive 3-year-out trends and favorable macro tailwinds. And then, in an office or friends’ conversation, they learn about that small cap company that just delivered an above 50% return within barely a year. Who wouldn’t get interested in testing the waters with some money?

All this has pushed the Indian stock market capitalization to historic heights. Last May, it reached a value of $5 trillion, making India the fifth country in the world to reach that milestone. The ratio of market cap to GDP sits close to 150%, which is a high value by any standard. The first trillion of that total market value was reached in 2007. Then it took ten years, in 2017, to reach the second trillion, but only four more years, in 2021, to reach the third trillion. But wait, from there, the fourth trillion was reached in only two years, November 2023 and the current mark of 5 trillion took only six months to be reached! This acceleration is what has everybody thinking two things. First, how do I get a piece of that? But second, is it too late now and has the India stock market become too expensive? The afore-mentioned market cap-to-GDP ratio suggests some over-valuation. On the other hand, the P/E ratio of the stock market sits at around 25, which is not particularly high. All this to say, that while probably corrections are to be expected due to recent exuberance, the fundamentals of the Indian economic story are strong enough to suggest further growth in the stock market. Unless there is a severe downturn, it is safe to say that the love story between stocks and the Indian average investor will continue unabated.