The benchmark indices have recovered about 40 per cent from the recent lows, but longer-term returns from the Indian stock market
continue to remain subdued. As an analysis of different asset classes published in this newspaper on Monday showed, the Nifty50 Total Returns Index, which includes dividends, went up by an annual rate of 9.3 per cent over the past 10 years. Returns over the past five years were even lower at 7 per cent, down compared to other avenues such as fixed deposits, public provident fund, 10-year government bonds and gold. As a result, most equity mutual funds have also given poor returns. Over a 10-year horizon, equity returns were marginally better than other assets, but not enough to compensate for the risks involved.
Yet people are being forced into equity markets by the low yields on debt paper, and by the flush liquidity that is the result of loose monetary policy in many countries, especially the US. As it happens, most of the investment is flowing into a handful of stocks, which now dominate the benchmark stock market
indices much more than before. The current rally, therefore, is not broad-based. The underlying cause is of course the poor performance of the corporate sector in the last decade, following the excessive gearing on capital-intensive projects and the resulting balance sheet crisis as interest cover plummeted. Many companies have gone under. The data shows that the interest coverage ratio has not really improved. This is to be expected because of weak performance. A corporate results analysis of over 1,000 companies — excluding information technology and financial sector firms — for the January-March quarter by this newspaper showed a combined pre-tax loss for the first time in at least 24 quarters. This may be seen as a passing phenomenon, but against the backdrop of continued high gearing, the likelihood of a fresh wave of defaults once the moratorium comes to an end, a global economy in poor shape, and the possibility of weak investment because of weak consumption and, therefore, surplus capacity, the outlook isn’t great.
At some point, the fiscal stimulus too will die out as tax revenues continue to fall short. If gross domestic product
at constant prices in 2021-22 is going to be broadly at the same level as in 2019-20 (a decline of about 5 per cent this year followed by recovery in the next year), the country has basically lost two years because of Covid-19. This will have a direct impact on corporate earnings. It is only logical to expect that the market will at some stage reflect that prospect — thereby prolonging the poor performance of equity markets. It is possible that the stock market
can go up from the present levels because of high liquidity in the financial system. However, it would stretch valuations even further and increase risk. In this context, the sudden rise in direct participation by retail investors
in the stock market is worrying. Small investors may not fully understand the dynamics of the market and may get caught at the wrong end of a liquidity-driven rally. A sustainable rally, which can improve returns over time, needs earnings support. But that is not in sight at the moment.