 "Raamdeo Agrawal on why the Budget couldn't dent retail investors' sentiment")
Capital market experts believe that India’s stock markets are going through an ‘unprecedented boom’ and that’s why the Budget announcements didn’t dent much of the retail investors’ sentiment. However, they also cautioned against a possible fall on the horizon.
When asked why the markets hadn’t declined post-Budget and were still performing well, Raamdeo Agrawal, chairman and co-founder Motilal Oswal Financial Services, explained that the market was experiencing a significant retail inclusion boom, with the number of retail investors growing from 40 million in 2020 to 162 million.
Speaking at the ‘Budget with BS: The Fine Print’ — a post-2024 Budget event hosted by Business Standard, Agrawal noted that nearly a trillion rupees in retail flows were driving the market, with foreign investors also becoming net buyers. Domestic investors were holding substantial cash, leading to relentless liquidity and a shift from bank deposits to financial markets, which the government was encouraging.
“There is a lot of liquidity, a lot of shift from bank deposits to financial markets. Capital formation is finally happening,” he remarked. Agrawal also said that the budget was a minor event, irrelevant to the markets.
Meanwhile, Nilesh Shah, managing director, Kotak Mahindra AMC Ltd, gave a Bollywood twist to the Union Budget and Indian stock market performance. Shah likened the Budget day to a “Mughal-e-Azam”, stating that the Finance Minister managed to balance fiscal prudence without stifling the market.
He described the subsequent market scenario as a ‘Lagaan’ movie, where the local team outsmarted foreigners. Shah detailed the phases of market activity: the ODI phase during Covid-19 when foreigners were selling, the test phase in October 2021-22 with significant foreign sell-offs, and the T20 phase involving exit polls and election results, where foreigners bought and retail investors sold.
He called the current phase like the movie ‘Amar Akbar Anthony’, referring to fundamentals, liquidity, and sentiment.
Also Read
Meanwhile, Prashant Jain, founder and chief investment officer, 3P Investment Managers, expressed that investors are rational, and capital will always seek the next best option. He pointed out that the gap between fixed income and equity income had widened, making fixed income less attractive.
“In fixed income there is no earning. The gap between fixed income and equities income has gone up,” he said.
Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies, commented on the liquidity-driven nature of the market, asserting that valuations were not overly stretched currently.
However, he drew a parallel to the 1987 liquidity boom in the United Kingdom, which led to a crash, but clarified he wasn't predicting the same outcome for the current Indian market. Holland emphasised that markets don’t move in a straight line and are currently fuelled by a global liquidity frenzy. Reflecting on the market’s performance, he expressed cautious enjoyment.
“My feeling is I am enjoying the ride, I look back over time and it makes me cautious,” Holland quipped.
Disconnect between stock valuations and company earnings
Regarding the disconnect between market valuations and earnings growth, Holland observed that retail ownership had grown but believed the Budget hadn’t significantly impacted this trend. He mentioned that debt markets were no longer appealing, making equity the primary option for retail investors. He questioned whether large companies receiving substantial government orders would meet market expectations.
“Earnings have never been lived up to the expectations of the market,” Holland said.
Meanwhile, Jain highlighted India’s status as a relatively low-inflation economy with nominal GDP growth of 11 per cent. Corporate profits to GDP had recovered to 5.5-6 per cent, driven by significant earnings growth in recent years.
Despite potential slowdowns and downgrades in corporate profit growth, Jain was comfortable with the current earnings trajectory.
“Corporate profit growth will slow down now. There could be downgrades but I’m okay with the earnings trajectory. Current multiples when taken in 10-15 year average, they are reasonable and well justified,” he said.
But Shah warned that while markets value sustained earnings growth, India might be at risk due to insufficient future investment. He pointed out that the country’s R&D investment as a percentage of sales was much lower than needed. Shah compared this with China’s $4 trillion lending to corporations for capacity expansion, urging entrepreneurs to build cash reserves for future investments.