Equity investors’ wealth swells to new peak

The wealth of investors in Indian equities has swelled to its peak, driven by a surge in certain blue-chip companies in the past four months. The overall market capitalisation of all the companies on the Bombay Stock Exchange, which denotes the wealth of the investors, breached the historic Rs 160 lakh crore mark in the past week and stands at Rs 160.57 lakh crore.

The market capitalisation (m-cap), the value of a company that is traded on the stock market, is calculated by multiplying the total number of shares by the present share price. The m-cap of all BSE listed entities has surged by 15.9% (Rs 22.02 lakh crore) since the day the Centre slashed the corporate tax rates on September 20, 2019.

Prior to this, the m-cap of India Inc had peaked to Rs 156 lakh crore on June 4, 2019, on the back of the re-election of Prime Minister Narendra Modi in May 2019. However, the economic slowdown coupled with the policy missteps led to an erosion of 11.3% (Rs 17.6 lakh crore) in the equity wealth of the investors.

In dollar terms, the total market cap of all firms in India stands at $2.26 trillion, 15.4% less than the combined valuation of just two US-based tech firms – Apple and Microsoft.

The surge in the wealth of the equity investors has been primarily driven by 16.1% growth in bluechip Index – Sensex – since the slashing of the corporate tax rates. The growth in the benchmark index again is polarised by the windfall gains of selected top companies on the Index.

The shares of India’s most valuable firm, Mukesh Ambani-controlled Reliance Industries have surged by 34.1% -- more than double the return the index provided -- since the day the corporate tax cut was announced. The gains have been driven by RIL’s bid to bring down its net debt to zero through two deals with Saudi Aramco and British Petroleum, coupled with a windfall from the corporate tax cut.

Ironically, the shadow banking crisis is also contributing to this wealth creation: as investors are looking for the safer non-banking financial companies (NBFCs) in the markets, they are parking money with two bluechip shadow banks – Bajaj Finance and HDFC. While the shares of the Bajaj Finance have surged by 25.8% in the past four months, the shares of HDFC have surged by 24.3%.

However, analysts believe that this rally isn’t sustainable in the long run. “We should be cautious about the current market movement and look at diversifying the portfolio as this rally may not be as deep as it appears,” according to analysts.