Expectations of a strong electoral win for the BJP, a one-time bonanza that will allow the government to splurge on capex and sustain growth, and expectations of foreign investors returning to Indian markets after the elections, combined with retail frenzy drove markets to new highs, with the Nifty touching 23,000 on May 24.
The Reserve Bank of India’s whopping dividend payout of Rs 2.1 lakh crore for FY24 has given the stock markets a major reason to celebrate. The frontline indices saw major gains on May 23 in banking and financial stocks, the primary beneficiaries of this windfall. The gains have been extended in trade today.
Doubling the Rs 1.02 lakh crore projected in the 2024 interim budget, this hefty dividend provides the government with extra funds to ramp up capital expenditure, lower the fiscal deficit, or a mix of both. Whatever the path, it’s already lifting market sentiment.
Additionally, the expectation of the incumbent government returning to power and ensuring political continuity has led to an optimistic market sentiment. In a recent report, global brokerage Bernstein said the Nifty could give double-digit returns if the NDA-led government returns to power with 330-350 seats, which has a high probability.
In the previous session, foreign institutional investors returned to domestic equities, turning buyers after offloading their holdings over the past few weeks.
Experts suggest the FIIs' return was bolstered by the certainty of the election outcome and the RBI's largest-ever dividend to the government, which is giving investors further confidence.
$5 trillion market cap
The frontline indices have been on a tearaway rally over the past two weeks, with the Nifty jumping over four percent in the past ten sessions. However, the outperformance of broader indices and robust retail participation led to the market capitalization of companies listed on BSE crossing a record $5 trillion for the first time on May 21.
On May 21, the total market capitalization of BSE-listed companies topped the coveted $5 trillion mark, rising $633 billion since the start of the year, and has taken six months to climb from the $4 trillion level it previously hit in November 2023.
During this period, PSU stocks, capital goods, infrastructure, utilities, and power companies grew the most, contributing to gains in the market capitalization of the overall listed universe. During this time, the gains in large-cap stocks were limited in comparison.
As a result, India is now part of a select group of global markets that boast a market capitalization of $5 trillion and above the US, China, Japan, and Hong Kong.
What sectors led the gains?
The rally has been led primarily by cyclical sectors like power, infrastructure, and utilities which have surged by over 50 percent in the last six months.
Also, some of the large contributors to the growth were PSU stocks, owing to their strong revenue visibility, improved operational efficiency, and better execution track record, said Manish Chowdhury, Head of Research, StoxBox.
The combined weight of stocks from these in the frontline indices is lower in the Nifty and Sensex compared to the broader markets. As investors flooded money into these sectors, the broader markets outperformed the frontline indices, which remained muted in comparison.
The market capitalization of the listed PSU stocks on the BSE jumped 58 percent, while the BSE Utilities, BSE Capital Goods, and BSE Industrials indices saw their market cap also surge by around 50 percent.
In contrast, FMCG, private banks, and IT indices underperformed, with the market cap rising in the low single digits during the same period.
Broader markets’ outperformance
The mid- and small-cap indices have surged to record highs, despite concerns regarding overstretched valuations. The contribution to the up-move in the market capitalisation has come from the broader market, which has continued to scale fresh highs, despite concerns on the valuation front.
The last three years have seen a significant re-rating in the mid and small-cap space, and as a result, the indices are trading at over a 20 percent premium compared to their historical averages based on one-year forward PE, said Sushant Bhansali, CEO, of Ambit Asset Management.
According to Vaibhav Shah, Fund Manager at Torus Oro AMC, while there are worries regarding lofty valuations, if the broader market’s underlying fundamentals and the central government’s focus on developmental policies remain intact, there is no serious risk to the mid-and small-cap stocks.
Hitesh Jain, Strategist, YES Securities doesn’t see a challenge in valuation terms for mid- and small-caps, since the broader expansion in the economic cycle is favoring small and medium enterprises. Additionally, these companies have reported better earnings, as the number of SMIDs reporting a loss has shrunk dramatically.
Domestic, retail investors drive rally
As foreign portfolio investors offload their holdings in Indian equities, domestic investors remained buyers. The optimism in DIIs can be attributed to retail investors, who have remained steadfast in their contribution to the market gains.
The significant retail participation can be seen from the increase in new demat accounts, which rose from 3.5 crore in March 2019 to 15.1 crore in March 2024.
Sentiment bullish on favorable policies
According to experts, India’s post-pandemic recovery has led to a surge in industrial activity, consumer spending, and strong GDP growth. Indian corporations have responded well to the government’s schemes, reforms, and investments.
This has contributed to sustained earnings growth, further attracting investor interest. “Improved corporate earnings and profitability across various sectors have positively impacted stock prices,” said Vinit Bolinjkar of Ventura Securities.
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