Indian stock market benchmark Nifty 50 has delivered zero returns over the last two years. On Friday, 3 July, the index closed at 24,271. On 3 July 2024, it was at 24,286. This is a 0.06% decline in two years.
In fact, the Indian stock market has underperformed most global markets over the past three years.
What explains this poor performance of the domestic market when the country’s gross domestic product (GDP) grew by 8.2% in FY24, 7.1% in FY25, and 7.7% in FY26?
Of late, the narrative behind the underperformance of the Indian stock market has been centred around the lack of AI-trade in the country and increased geopolitical and geoeconomic risks emanating from the regional conflicts and US tariffs.
However, beyond these factors, it is the disconnect between the fundamentals and valuations that might have scripted the poor show of the Indian stock market.
Why has Nifty underperformed over the last 3 years?
As per brokerage firm Kotak Securities, the main reason behind the underperformance of the domestic market could be a mismatch between earnings growth and valuations, as well as the low resilience of the domestic economy to global disturbances.
“We would attribute the weak absolute and relative performance of the Indian market over the past two years to high valuations relative to fundamentals (earnings) and quality of business models in several sectors, and low (but improving) resilience of the economy to global disturbances given India’s high external dependencies on capital and technology,” said Kotak Securities in a report.
The brokerage firm added that the usual arguments of AI and geopolitics seem superficial as they only highlight India’s structural and technology challenges at a deeper level.
Kotak underscored that several sections of the Indian market have been complacent about the quality of the Indian corporates’ business models and disruption risks to them.
Moreover, Kotak believes the market has been too optimistic on earnings and too generous on its valuations for the past few years.
“In hindsight, both earnings and valuation multiples have turned out to be too optimistic in the context of large earnings downgrades over the second half of FY25 to the first half of FY26, and weakening business models of companies. The destruction in the market caps of the IT services companies in the past few months is a case in point,” Kotak noted.
The brokerage firm underscored that this disconnect between fundamentals and valuations still persists in several parts of the market despite a strong time and modest price correction over the past two years.
Investors remain bullish on the market
Kotak pointed out that despite the domestic market’s poor show over the last three years, it does not see any meaningful change in the mindset of various classes of market participants.
“Retail investors presumably continue to expect high returns and deploy large amounts of funds through bulk and SIP investments in MFs despite very weak returns of the past 2-3 years,” said Kotak.
“SIP returns are below FD returns on a three-year basis. DIIs continue to channel the retail money into the market, while FPIs have stayed wary on fundamentals and valuations with AI opportunities in other markets further reducing India’s appeal,” Kotak said.
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Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of the broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
