The myth of market buoyancy has multiple holes in it

A recent research report from a prominent Mumbai brokerage house has shocked Indian capital markets by lifting the veil over the Indian stock market's nonperformance.

- RAJRISHI SINGHAL

But in doing so, the report also inadvertently focuses the arc-lights on two other consequential issues: the crisis in India’s savings economy and a need to understand the government's pressing need to perpetuate the myth of a buoyant stock market.

This controversial note—titled I-year, $90 bn and 0% Return Later from Kotak Securities—deflates much of the recent hype over stock market buoyancy by pointing to low corporate earnings growth and near-zero investment returns over the past 12 months. The report points out that assertions about the stock market's weak performance have been made to appear counter-intuitive, or even flimsy, when viewed against some of the dominant narratives built around stock indices: such as a rising swell of retail investments into equity markets, periodic bullish statements about certain sectors or certain investment themes, or even the benign fiscal and monetary support provided to capital markets through tax and interest rate cuts. But the claims of poor performance begin to look real when viewed through the lens of middling earnings amid sky-high valuations.

Specifically, a lot of hyperbole and explanations have been riding on the surge of retail investments in equity markets, primarily through the vehicle of equity mutual funds. These inflows have been showcased as an indicator of market buoyancy, rather than the symptom of a malaise elsewhere. It also disregards fundamentals that have been dragging down both corporate and market performance.