India looks for spot among the global top five of equity markets

M-cap gap with UK narrows to 2% from 8% in a month

India’s surging equity market is aiming to break into the global top five. It is threatening to overtake the UK, which currently occupies fifth place in the league tables of countries/regions in terms of market capitalisation. The top four are the US, China, Japan, and Hong Kong.

The market cap of all listed companies in India is currently $3.67 trillion, about 2 per cent below that of the UK, which has a market cap of $3.75 trillion.

About a month ago, the m-cap gap between the two countries was as much as 8 per cent, following the sell-off triggered by the spread of the Omicron variant of Covid-19 and sustained selling by overseas investors.

India’s ranking had slipped to seventh, below France, after the benchmark Sensex dropped to a four-month low of 55,822 on December 20.

Since then, there has been a sharp rebound, with India emerging as the best-performing major market over the past month following gains of over 8 per cent in dollar terms. This has helped India overtake France, which currently has a market capitalisation of $3.37 trillion.

US, China, and Japan have seen an erosion in their market cap over the past month amid worries over the Federal Reserve hawkish stance, the spread of the new Covid-19 variant, and sell-off in technology stocks.

India’s markets have extended their 24-per cent gain made in 2021 despite headwinds, such as the spike in oil prices and rising bond yields, besides concerns around expensive valuations.

However, on Tuesday, the rise in bond yields and oil prices weighed on investor sentiment and the benchmark indices dropped close to a per cent. Most European and the UK markets also corrected.

Bond yields both in the US and India have surged to multi-month highs on the back of a much anticipated four rate hikes by the Federal Reserve this year due to worries of high inflation. Meanwhile, global Brent crude has hit its highest level since 2014 amid rising tensions in the Gulf. These factors could weigh on risky assets in the near term.

Analysts attribute this year’s upbeat performance of the Indian markets to strong domestic flows. “We think one factor at play is strong domestic liquidity. The inflows into mutual funds have remained robust with a strong pick-up in SIP inflows. In addition, direct retail participation is strong. This is further supported by a slowdown in overseas selling. Besides flows, fundamentally, expectations from corporate earnings remain high,” says Saion Mukherjee, Managing Director & Head of Equity Research, India, Nomura.

India’s market cap rise has also been supported by a stronger rupee. The domestic currency has appreciated close to 3 per cent against the dollar in one month, boosting market cap in dollar terms.

In November, too, India was on the verge of overtaking the UK with the m-cap gap between the two countries falling below 2 per cent. However, a sharp correction in the domestic markets once again widened the gap.

Experts say on the valuation front, there is little room for further expansion. For a meaningful upside from current levels, corporate earnings growth has to remain strong, they add.

The consensus earnings estimate for Nifty50 companies has seen a slight reduction for FY22 and a marginal increase for FY23 and FY24.

The Street expects earnings growth of about 30 per cent in FY22 and 15 per cent each in FY23 and FY24.

“We value the Nifty50 at 10 per cent premium to last 10-year average P/E of 20.5 times on December 23 EPS of Rs 887; we arrive at a December 22 Nifty target of 19,979,” says Amnish Aggarwal of Prabhudas Lilladher. The price target implies a 10 per cent upside from current levels.