Sensex races past developed markets in last one month, rises 14.2%

After underperforming many developed markets for the better part of the past two years, the Indian equity markets are now pulling ahead of their peers in North America and Western Europe.

The benchmark BSE Sensex is up 14.2 per cent in the past one month against a 3 per cent appreciation in the Dow Jones during the period.

In the same period, the United Kingdom’s benchmark FTSE 100 is up 2.1 per cent, France CAC 40 index 7.3 per cent, and Germany’s DAX Index 6 per cent (see chart).

In contrast, the Sensex has been a laggard compared to stock indices in the developed markets in the past one year. For example, it is down 11.3 per cent since June last year against a 0.6 per cent rise in the Dow Jones during the period and 1.6 per cent rise in the Dax index during the period.

The Indian markets also underperformed the US counterparts over a three-year period. In the past three years, the Sensex is up 12.3 per cent against a 20.3 per cent rally in the Dow Jones during the period.

Experts attribute this to technical reasons and benign liquidity rather than any material change in India’s economic outlook or corporate earnings. “A relatively good performance by the Indian markets in the past few weeks is largely due to technical reasons as the Sensex tries to catch up with its global peers. Corporate earnings in India are likely to remain depressed, given the rising tally of Covid-19 cases and new containment measures such as suspending train services,” said U R Bhat, director, Dalton Capital Advisors.

Others see a strong influence of monetary expansion in developed markets feeding emerging ones, including India.

“The market movement is now largely a function of liquidity. Foreign portfolio investors have been net buyers in the past two and half months after they sold heavily in March and February. This inflow has been supplemented by domestic investors, including mutual funds, pushing markets higher,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory Services. According to him investors hope a significant part of nearly $11 trillion worth of fiscal and monetary stimulus by the United States, Western Europe, and Japan will come to emerging markets like India, lifting stock valuations and corporate earnings in the forthcoming quarters.

There is, however, a disjunction between the Indian markets’ relative outperformance and underlying corporate earnings.

Corporate earnings for the March 2020 quarter suggest that India Inc has taken a bigger knock from the pandemic than their peers in North America and Western Europe. This shows in the Sensex’s underlying earnings per share (EPS), which track the combined net profits of the 30 companies that comprise the index. The index underlying EPS is down 7.6 per cent since the beginning of the current calendar year in line with corporate performance during the January-March 2020 quarter.

In contrast, the Dow Jones underlying EPS is down 5.2 per cent during the year so far, and it’s 5 per cent lower in the case of the Dax. The FTSE 100 and CAC 40, have, however reported a much bigger decline in underlying EPS due to the presence of commodity heavyweights in these two such as Royal Dutch Shell, BP, BHP, Total, and ArcelorMittal.

At the macro level, economists expect India’s GDP to do relatively well than in developed markets in the current fiscal year.

“According to most estimates, the GDP decline in India due to the pandemic will be lower than in developed markets by 50-100 basis points. But India’s growth recovery in FY22 will also be relatively low,” said Madan Sabnavis, head economist, CARE Ratings.