Photo: Mint
Photo: Mint

Weak earnings, demand shocks, bad loan mess crimp market returns in NDA’s term

  • Benchmark Sensex gained 57% under NDA against a 140% surge under UPA I in 2004-09 and a 98% rise under UPA II in 2014-19
  • Foreign investors invested $27.7 bn in Indian equities in 2014-19 against $112 bn in 2009-14

MUMBAI: Though investors pinned hopes on the Narendra Modi-led government to take the markets to new highs with a promise of ‘achhe din’, equities did not shine as much as in the previous two governments led by the United Progressive Alliance (UPA)—a coalition of left and centre-left political parties formed after the 2004 general elections.

The largest member of the UPA is Congress. Manmohan Singh was prime minister in both UPA terms from 2004-2009 and 2009-2014.

In Modi’s tenure, the Sensex has gained 57.25% till date, while the benchmark index rose 98% in 2014-19 and 140% in 2004-09. BSE Midcap rallied 84% in the past five years after gaining 104% in 2009-14 and 91% in 2004-09. BSE Smallcap jumped 76% in the past five years after rising 84% and 127% in 2009-14 and 2004-09, respectively. Analysts said weak earnings growth in past five years, pressure on margins, interest costs and asset quality issue of banks and overall steep valuations took shine off markets in the past five years.

Vinod Karki, vice-president (strategy), ICICI Securities Ltd, said: “2014-19 was more of a valuation expansion story as domestic flows improved significantly, while earnings continued to be stagnant." According to him, 2004-09 was a genuine bull run, which was supported by strong earnings and balance sheet growth and, hence, the high performance. He said FY09 saw the unfolding of the Lehman crisis and resulted in the massive slide in stocks globally.

“The 2009-14 period had the benefit of a significant favourable base effect due to the meltdown in global stocks post the Lehman crisis. The returns were further augmented by the unleashing of the quantitative easing (QE), which supported risk assets like stocks despite weak earnings growth except for a brief period of growth in FY10," he added.

Others concurred. Mihir Vora, chief investment officer, Max Life Insurance, said for the past five years, earnings growth has been subdued because of pressure on margins, interest costs and non-performing assets (NPA) of banks. “Thus, almost 80% of the returns from the market are due to valuation increase—liquidity flowing to stocks through foreign investors, mutual funds, insurance and retail investors have pushed up prices without corresponding improvement in fundamentals."

Analysts said that weak private capex and industry credit cycle, demand shocks such as demonetization, NBFC credit crunch, interest rate hikes by the US Federal Reserve in 2018, and stagnating earnings were challenges faced by the markets in the last five years.


Another striking data point is that the government stocks have underperformed considerably in the last five years. BSE PSU index fell 5% in 2014-19 till date, while the index rose 26% in 2009-14 and 87% in 2004-09. “Bulk of the PSU underperformance has been driven by PSU banks, which have taken the brunt of the NPA recognition cycle," said Karki.

Vora said that there has been a combination of factors that led to weakness of government stocks in the last five years. “Defence and capital goods PSUs had gone up in the run-up to 2014 expecting huge indigenization and pickup in investment cycle, which never materialized. Moreover, there were statements indicating that PSUs in the capital goods segment or defence should make only a certain level of margins–such sentiments further led to de-rating of these stocks," he added.

Foreign institutional investors invested $27.7 billion in Indian equities in 2014-19, compared with $111.97 billion in 2009-14. Domestic institutional investors were net buyers of Indian shares worth 2.88 trillion in the last five years, while they were net sellers of 1.31 trillion in 2009-14. Rupee weakened in the past five years (down 16.21%) after weakness of 15.97% in 2009-14. Brent crude prices cooled off 33.30% in last five years, while they were up 96.05% in 2009-14.

Analysts said markets are expecting a stable government, which could continue with the reforms and steps towards reviving the private investment cycle, while adhering to fiscal discipline.

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