Markets failed to sizzle under NDA govt in last five years, say experts

Indices delivered annual returns of 9.2% amid tepid corporate earnings growth

When the BJP-led National Democratic Alliance (NDA) came to power in May 2014, the markets rallied buoyed by the hope that the resounding mandate given to the NDA would lead to policy decisions favourable to industry. 

However, five years on, the benchmark Sensex is up only 53 per cent since May 26, 2014, the day Narendra Modi was sworn in as the 15th Prime Minister of the country. This translates into annualised returns of 9.2 per cent, which is below the 10-14 per cent considered to be the average long-term annualised returns for equities as an asset class.

The returns are also well below what the markets had posted during the two Manmohan Singh-led United Progressive Alliance (UPA) governments. During the five years of UPA 1 (2004-09), the Sensex delivered annualised returns of 22.6 per cent and another 12.4 per cent compound annual growth rate (CAGR) under UPA 2 (2009-14). The sub-par returns under the current government will disappoint investors who had pinned their hopes on the performance of the Modi government.

As it turned out, in the last five years, corporate earnings belied expectations due to the turbulence caused by big policy decisions like demonetisation in November 2016, the implementation of the goods and services tax (GST) in July 2017 and The Insolvency and Bankruptcy Code (IBC) in May 2016. The note ban was particularly painful for companies outside the large-cap universe.

“The mandate given to the NDA government provided solid political stability. That gave a lot of confidence to the markets. Reform measures like GST, the bankruptcy code and insurance reforms were also well-received by the markets. As a result, valuation multiples increased, but earnings failed to improve. Had the earnings also improved, the market returns would have been much more,” says G. Chokkalingam, founder, Equinomics Research Advisory.

Some experts are of the view that though policy decisions such as demonetisation were disruptive in the near and medium term, they will have a positive impact on the economy in the long run.

“What has happened in the last five years is akin to what happened in 1991 — a structural transformation of the economy,” says UR Bhat, managing director, Dalton Capital India. “In a democracy, governments are usually loath to take decisions that bear fruit after five years. Some of the reform measures like demonetisation, GST, IBC and Jan Dhan Yojana have helped plug the leakages in the system. The fruits of these measures will be evident in the next five years.”

Others point out that while the stock markets dipped after demonetisation, it recovered in no time as the note ban led to an improvement in savings and channelled huge inflows into the equity market through the mutual fund (MF) route.

“Modi galvanised middle-class investor sentiment in favour of financial assets. In fact, financial assets became more popular in the last five years than at any other time in Indian history,” says Saurabh Mukherjhea, founder, Marcellus Investment Managers. “And it is not just the stock market. Measures like the crackdown on black money through demonetisation or the implementation of the Real Estate (Regulation and Development) Act (RERA) led to favourable middle-class investor sentiment towards other financial assets as well,” he adds.  

In the past two financial years, domestic investors have put in an unprecedented Rs 2 trillion into equity MFs. This has helped reduce India’s dependence on foreign flows and protected the downside for the markets during huge capital outflows.

That said, market players feel that foreign institutional investors (FIIs) are a dominant force and continue to be price-setters in the market. During September and October 2018, the market witnessed over 10 per cent correction following a huge a sell-off by FIIs owing to the spike in the US dollar and bond yields. Again, in the past one month, stock prices have rallied sharply, thanks to over $6 billion of foreign inflows amidst the cooling off in the US dollar and bond yields.

Experts say that post the global financial crisis in 2008, the performance of most emerging markets (EM), including India, has been affected by the policies of the US central bank. Hence, the performance of the Indian market under the Modi government should also be viewed in the context of how it has fared vis-à-vis other EMs or the world market.

After the latest rally, India’s market returns from May 2014 till now are similar to those of the Dow Jones of the US. But are lower when compared to China and Brazil. 

Going ahead, analysts say, India’s corporate earnings growth is likely to be the highest in the region in the next two years, which will give a further impetus to the stock market. According to an HSBC research note, India is finally coming out of a “prolonged earnings recession” and its corporate earnings outlook for the next financial year is the highest among Asian economies.