In recent years, the Indian stock market has been experiencing a remarkable surge, reminiscent of the exhilarating rise of the American market during the 1990s, often referred to as the "Roaring Nineties." Over the past five years, the Nifty 500 index—a broad measure of India’s stock performance—has skyrocketed by an astonishing 126%, significantly outpacing the S&P 500 which saw an increase of approximately 83% in the same timeframe. This lifting tide has sparked an undeniable excitement among local investors, as an increasing number of retail investors are diving into India's thriving $5 trillion stock market, actively pursuing their aspirations for wealth accumulation. The cultural phenomenon known as "equity culture" is evidently taking root in the Indian investment landscape.
When reflecting upon the speculative frenzy that characterized the late 1990s in the United States, it is striking how similar circumstances are unfolding in India today. Historically, the American market at this time witnessed record-breaking highs in stock prices, enriching a whole generation of investors. It was primarily the emerging "equity culture" that fueled this growth, allowing households to double their investments in stocks to about one-third of their total savings. Fast forward to the present, as retail investors in India continue their aggressive participation in the market, analysts speculate that the country may be on the brink of a similar explosive growth.
Indeed, sentiment remains buoyant, with substantial capital inflows bourgeoning in the Indian stock market. According to Morgan Stanley's data, retail investors increased their holdings in local stocks by 8 percentage points over the past decade, reaching 23.4% at the end of 2023. Meanwhile, JPMorgan reports that domestic institutional investors have maintained a streak of net buying for 14 consecutive months, with record inflows of $12.8 billion in October alone, marking a historic single-month high.
Currently, domestic institutional investor holdings are approaching peak levels, bringing them to a striking proximity to the holdings of global fund managers for the first time. Bloomberg analysts observe that this shift in investor sentiment is poised to redefine the Indian market, establishing it as a vital engine for wealth creation in the country with the largest population in the world.
While high valuations and capital outflows from foreign investors pose concerns, many Indian investors remain unfazed. They perceive the current bull market as just the commencement of a remarkable journey. Analysts believe that the fervor of retail investors towards stocks could bolster the local market's resilience against global shocks. In August this year, global market uncertainties, triggered by concerns over highly valued AI stocks, led to a significant sell-off, with the MSCI Asia-Pacific index plummeting over 6% on August 5. However, during that tumultuous time, the Nifty 50 index experienced a decline that was less than half of its counterparts.
Now more than ever, investors are shifting their gaze toward the Indian market. Reports indicate that the stock buying frenzy has led to staggering oversubscriptions of new listings, sometimes reaching as high as 400 times. Companies debuting this year have experienced average first-day gains of around 25%, compared to just 12% in the U.S. Such figures suggest a palpable investor enthusiasm and confidence in the Indian stock market's potential.
Christopher Wood, Global Head of Equity Strategy at Jefferies LLC, remarked, "I cannot recall witnessing such intense structural change. The Indian market is presently driven by domestic investors, and this trend may likely continue. There are numerous parallels with what transpired in the U.S. during the 1990s." The flourishing of the U.S. market in that decade was bolstered by a combination of factors:
Tax reforms ignited greater interest in 401(k) retirement plans; discount brokerage services from firms like Charles Schwab and E-Trade Financial helped to reduce brokerage fees; and the rise of technology also played an essential role in the investment landscape.
Similarly, the Indian stock market is undergoing its own renaissance. In 2018, the government relaxed restrictions on national pension plans, allowing for greater equity investments and reduced redemption taxes. The emergence of discount brokers like Zerodha, which now accounts for over half of the total independent accounts in the country, has also fueled growth. Furthermore, commission-free trading has enticed many new investors to enter the market. As a result, Indian investors are witnessing substantial returns; Morgan Stanley's reports indicate that Indian households have amassed approximately $9.7 trillion in wealth over the past decade, with investments in stocks being a significant driver of this growth.
Analysts on Wall Street express optimism: "We expect domestic equity investments in India to remain robust, with allocations potentially rising to double digits over the next few years. Given the younger demographic and lower base, India’s growth trajectory may indeed surpass that of the American boom."
However, amidst this exuberance, there are growing concerns regarding the sustainability of such a meteoric rise. With retail investors increasingly viewing stocks as a "sure-fire investment," regulatory bodies are beginning to worry that this mentality could culminate in a crash similar to the implosion of the dot-com bubble in the United States. Consequently, regulators have introduced a series of measures aimed at curbing speculative bubbles, while cautioning small investors to remain vigilant against the perils of market euphoria.
Yet, as signs of risk begin to emerge, data indicates that the market capitalization of all listed companies recently reached the highest proportion of GDP since the global financial crisis. Siddhartha Bhaiya, Chief Investment Officer at Aequitas Investment Consultancy Pvt, warned, "A bear market is inevitable." Indeed, the Indian stock market seems to have commenced a significant pullback recently.
This October, foreign investors withdrew over $10 billion from the Indian stock market, marking the largest monthly outflow since the COVID-19 pandemic began. This wave of capital withdrawal has placed pressure on the Indian stock market, leading to declines in large-cap and mid-cap stocks alike. As the market undergoes this tumultuous phase, it remains to be seen how the dynamics of investor behavior will shape the trajectory of India's financial future.