Stock markets reflect expectations of the future. And in the past one year, the stock markets have signalled that they have high hopes for the near- and medium-term future. Despite disruptive reforms like demonetisation and GST - or perhaps because of them - the markets have been rising relentlessly. In the past one year, the Sensex has gone up by 7,536 points, or a gain of 28.9 per cent, while the Nifty has gone up by 28.8 per cent, zooming from 8,033 to 10,348.
The BT 500 issue ranks companies by their average market capitalisation between October 1, 2016 and September 30, 2017. (We also look separately at revenues, profits, debt and other financial parameters.) In the period under consideration, the market capitalisation of the BT 500 companies has gone up by 20.8 per cent. The next 500 companies - that is numbers 501 to 1,000 have seen an even higher rise, with their aggregate market capitalisation rising by 26.9 per cent. Almost 30 per cent of the most valued top 500 stocks traded at their all-time high price in the month of October and November (till date), when the Sensex moved from over 31,000 points to above 33,000 points.
This has happened despite the fact that corporate earnings have been generally sluggish. Total income of the BT 500 group rose by an anaemic 6.1 per cent, though net profits growth was considerably better at 17.8 per cent. This was probably because of better cost controls. Meanwhile, while fresh investments and fresh borrowings have been slow, the cash and bank balance of BT 500 companies (excluding BFSI) have declined significantly by 20.4 per cent in FY '17, compared to just 4 per cent decline in FY '16.
Why are the markets so bullish? One reason is that most people feel the government is determined to clean up the system. The efforts to resolve the NPA problem through the Insolvency and Bankruptcy Code is an enormous step forward. GST, despite the initial hiccups, is the biggest tax reform being implemented in decades and once it settles down, the benefits will start accruing.
There are a couple of other reasons as well. Global markets have been on a high, and the Indian market is not delinked from the overall sentiments. Two, there are few asset classes now that look attractive vis-a-vis the stock markets. Real estate is still down in the dumps in major cities, and gold prices seem to have lost some favour with investors. A lot of retail money is now flowing into mutual funds as systematic investment plans, and that, in turn, is leading to additional investment in equities.