It takes corporate earnings, not crowds, to sustain a stock market boom

The Indian stock market has been in the global spotlight for what The Economist has called the “largest-ever experiment in participatory capitalism.” As share indices hit one peak after another over the past five years, attracting retail interest, India’s investor base has grown explosively. 

Of the country’s 176 million plus ‘demat’ accounts for equity holdings, a vast majority were opened only in the past five years. Likewise, a large chunk of the 101.2 million mutual fund accounts linked with Systematic Investment Plans, which draw monthly money into shares from households, are also relatively recent. 

Today, about a fifth of all Indian homes are reckoned to own company shares (directly or indirectly), a figure placed at 7% half a decade ago. The country has also been a global outlier on new listings. 

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With just 3% of the world’s GDP, it held 30% of all initial public offerings (IPOs) and raised 12% of the globe’s IPO money in the first three quarters of 2024. 

Our primary market has been action-packed, as the data shows, but it pales in contrast with the frenzy seen in equity derivatives, where trading volumes have been beating advanced-economy levels and inviting regulatory curbs. 

Indian participation in capital markets has been on a roll, clearly, a surge we can call phenomenal to the extent it reflects a mass awakening to the promise of equity ownership.

How long can we expect this boom to last? One temptation is to see it as the start of a self-driven expansion that may still have a long way to go. In a market supported by newcomers, if prices keep rising—a trend defied only by a slump since late September—it would attract even more new investors. 

The retail upsurge has already led investment narratives to include big-picture data. A recent report by Morgan Stanley analysts, for example, notes that only 3% of the overall household balance sheet is invested at cost in equities (excluding founders’ equity holdings). “This number,” it said, “could rise to double digits.” 

Other such proxies for India’s equity penetration have also been used for the argument that share ownership is likely to rise vastly since a large majority of homes are yet to buy any. This approach calls for caution. 

Statistics of population coverage work best for variables that apply to everyone or relate to basic needs, such as access to potable water. It is true that global businesses aiming to satisfy a primary need, like cola companies out to quench thirst, often track market penetration in terms of what fraction of a given country’s people are users of their products. 

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But this view takes eventual full adoption for granted, which is a brave assumption to make for most of what’s on sale in India, let alone equity shares. In a country of deep disparities, how far any offering can reach is often limited by barriers of income and class.

Still, since shares are claims to earnings, they could be classified as satisfiers of an elementary need. Low price points across the internet could cast a wide net too. If expansion drivers stay in place, demand could yet keep growing. 

But for the concept to get beyond a point, it needs durable appeal. For the promise of equity not to lose credibility each time the market dives, what shares earn must not get eclipsed by the story of capital gains (or lack thereof). 

Earnings define what shares are worth. Booms last if they are led by what shares earn and fizzle out when shares soar beyond price levels that profits justify and lose appeal as earners.

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