A sharp rise in the stock markets over the last one-year has raised concerns even within the government circles. While the Economic Survey pointed that the stock markets are at an elevated levels and pointed that policy vigilance will be required next fiscal if stock prices correct sharply, it said that factors such as expectation of earnings growth and government’s demonetisation move, drive against illicit wealth along with stringent reporting requirements for acquisition of gold and property has moved investors towards stocks.
Amidst all the talk of equity markets in India trading at higher valuation, the economic survey pointed that the price to earning ratio of Indian markets may have reached a higher “new normal”.
While there has been a sharp rise in inflow of domestic funds into Indian equities over the last one year both through mutual funds and direct stock investment, the economic survey stated that several factors have resulted in lifting the attractiveness of stocks for investors. It said that as cash transactions have been regulated; reporting requirements for the acquisition of gold and property have been stiffened, in addition to low returns on gold holding, investors have started re-evaluating stocks.”
“Previously, stock prices had suffered because reporting requirements were higher on shares than purchases of other asset. But the attack on illicit wealth has helped to level the playing field…..
All of this has caused investors to re-evaluate the attractiveness of stocks. Investors have accordingly reallocated their portfolios toward shares, with inflows through stock mutual funds, in particular, amounting in 2016-17 to five times their previous year’s level,” said the economic survey.
The survey further states that with all these changes the equity risk premium (the extra return required on shares compared with other assets) has fallen. It said that Perhaps, Indian P/E ratios have reached a higher “new normal”.
“It’s possible that the portfolio shift set in train by the campaign against illicit wealth will result in a sustained reduction in the ERP…. Beyond ERPs, sustaining current stock valuations in India also requires future earnings performance to rise to meet still-high expectations. And this outlook, in turn, depends on whether a significant economic rebound is this time well and truly around the corner,” the survey said.
Raising concern over the rising markets, it said that policy vigiliance will be necessary in the coming year, especially if high international oil prices persist or elevated stock prices correct sharply, provoking a “sudden stall” in capital flows. “The agenda for the next year consequently remains full: stablizing the GST, completing the TBS actions, privatizing Air India, and staving off threats to macro-economic stability.
While data accessed from Association of Mutual Funds in India (AMFI) shows that the net inflow into equity schemes of mutual funds for the calendar 2017 stood at an all-time high of Rs 140,201 crore, Indian firms mopped up over Rs 70,000 crore through primary markets during April-November of the current fiscal, a surge of 45 per cent from the year-ago period.
A large chunk of these funds were raised through equity route, to meet business needs, as compared to debt. “During the year (current fiscal) April-November, 134 companies accessed primary market and raised Rs 70,316 crore compared to Rs 48,325 crore raised through 80 issues during the corresponding period of 2016-17,” said the Survey tabled in Parliament on Monday.