A Focus on Equity Market in December ’23

The equity markets sustained a remarkable performance, concluding the year with the benchmark indices such as the Nifty and S&P BSE Sensex registering about a  20% spike. 

This underscored the eighth consecutive year in terms of positive returns. The mid-cap and small-cap indices notably outperformed the large-cap benchmarks. 

A few of the key drivers or events during the year included resilient growth in the US, a decline in oil prices, the Israel-Hamas conflict,  ongoing monetary tightening by central banks in Advanced Economies (AEs), volatility in the US and European yields, disappointment in  China’s growth, resilient domestic growth, and substantial government capex spending. Most sector indices saw gains, with capital goods,  auto, healthcare, and utilities emerging as the key outperforming sectors. 

Globally, most equity indices across AEs and Emerging Markets (EMs) experienced gains, except for China and Hong  Kong.

In 2023, Foreign Portfolio Investors (FPIs) were net buyers of equities worth US$ 21.4 billion. This marked a notable shift from the previous year when they were net sellers of US$ 17 billion worth of equities. Domestic institutional investors (DIIs) stayed net buyers, purchasing equities worth US$ 22.3 billion in 2023, as compared to a purchase of US$ 35.8  billion in 2022.

Flows into Mutual Funds (MF) remained steady, touching about Rs 2,48,000 crore in 2023 compared to Rs 2,24,000 crore in 2022.

Key trends in 2023 

Corporate profitability continues to be robust: Corporate profitability among listed companies improved, driven by profit enhancements in the energy sector (oil and gas, power, coal, etc.), banks, and the automotive industry. This positive trend has outweighed the subdued performance observed in the Information Technology (IT) and metal sectors. As a percentage of Gross Domestic  Product (GDP), the corporate profit to GDP ratio has climbed to 4.7%,  marking the highest level in the past decade. 

A surge in participation of retail investors: In 2023, there was a notable surge in retail participation in the equity markets. Systematic Investment Plan (SIP) flows experienced a substantial increase throughout the year, constituting about 40% of the Assets Under Management (AUM) of the mutual fund industry for equity-oriented schemes. Importantly, this expansion in retail participation was widespread, with the number of investor folios rising. The ownership of mutual funds in companies listed on the National Stock Exchange  (NSE) rose to 8.8% as of September 30, 2023, compared to 6.4% on  September 30, 2018. 


As of December 31, 2023, the Nifty 50 was trading at about 17.9x FY26E price-to-earnings multiple. Furthermore, market cap-to-GDP stood at about 100%  (based on CY25 GDP estimates), and the gap between 10-year Government Securities (G-Secs) yield and 1-year-Forward Nifty 50 earnings yield inched up too (Earnings yield = 1/ (one year forward P/E)). 

Current valuation multiples are at a premium to their historical averages. However, one should view these valuations in the context of structurally attractive nominal GDP growth, a healthy corporate earnings outlook and robust de-levered corporate and banking balance sheets. 

The sharp broad-based rally in the current financial year has resulted in small-cap and mid-cap indices significantly outperforming, and they now trade at a noteworthy premium to their long-term average valuation. Given the aggregate valuation being higher than the historical average, the importance of stock selection increases even more.  

Experts remain positive on equities over the medium to long term, considering the structurally robust domestic growth outlook, healthy corporate profitability and pro-growth policies. A sharp slowdown in global growth, escalation of geo-political tensions and re-acceleration in inflation globally or locally are material near-term risks. 

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