How did the Indian markets perform in fiscal year 2021?
The year 2020-21 has been a roller coaster for the Indian equity markets. From the lows seen during the end of 2019-20 on account of the Covid-19 induced lockdown, the markets recovered to reach new highs in the last quarter after vaccines against Covid-19 were approved and rolled out. BSE Sensex, the benchmark equity index of BSE, fell to 25,981.24 on March 23, its lowest value since December 26, 2016, but then rose to 52,516.76 on February 16, its highest ever value. It closed trading at 50,136.58 on March 30.
Best performing among major world indices even as GDP growth projection among lowest
A comparison of BSE Sensex with 10 major world indices across nine countries shows that it has been the best performing in the current financial year (till March 29). On a year-on-year basis, the growth (increase) seen in FY2021 is the highest in the past decade and sixth best since the index’s inception (1980).
The Sensex contracted by around 24% in FY 2019-20, the fourth worst performance in its history. European countries, including the UK and France, have seen lower growth as subsequent waves of Covid-19 forced them to announce further lockdowns during the year. This rise in India’s equity markets has come even as country’s economy is expected to see the third largest contraction (-8%) among these countries according to IMF’s latest World Economic Outlook data.
What facilitated this rise?
The rise was facilitated partly due to the lower base prevalent at the beginning of the year and higher foreign fund inflows seen during the year. The Sensex earlier contracted by 30% till the end of FY 2019-20 from its pre-Covid highs reached on January 14, 2020 due to the initial panic caused by spread of Covid-19 in the early months of 2020.
With monetary easing in the US and other major countries lowering interest rates, Indian equity markets also saw the highest foreign investment in its history ( ₹2,74,108 crore till March 30) during 2020-21. The rise in equity markets as well as lower prevalent saving interest rates in the banks also facilitated larger participation from domestic retail investors as new demat accounts, a good proxy for individuals trading in stock markets, grew by around 115% till January, the highest in the past decade.
Did all sectors perform well?
Sector sub-indices till March 30 show that firms in sectors such as metals, basic materials and industrials have seen the most growth in share prices in the last year. While every sub sector index has shown a positive growth (on account of lower base), comparison with their five-year growth shows that fewer sectors have actually performed well on a longer-term basis.
Will the rally sustain in next financial year?
A look at one of the most basic indicators of stock market performance, the price to earnings or PE multiple, suggests that the stock market rally seen during the year is not backed entirely by performance. The PE multiple measures price of a share to earnings per share. For the current year, the Sensex has seen highest the PE multiple (at 28.05) for a financial year since 1998-99 (the earliest period for which data is available).
This multiple has increased even as total yearly sales and profits of 30 Sensex companies has fallen on a year on year basis as seen in third quarter results of 2020-21, underlining the speculative nature of the current boom. Another indicator – the dividend yield which shows how much a company pays out in dividend each year relative to its share price -- is also the lowest in the current financial year.