The distorted equity markets

Even as the economy stutters, the stock markets have been rising unabated in India. An important driver has been the liquidity glut, especially from domestic investors. Sample this from Anand Kalyanaraman,

The bellwether Sensex of 30 stocks scaled new highs in 2019 with 15 per cent plus gain... Nearly 80 per cent of the 2277 stocks quoting on the BSE since the last year have lost value in 2019; just about one in five have gained. The BSE Mid-cap index is down 3 per cent, while the BSE Small-cap index lost close to 8 per cent. About 1240 stocks, or more than have the listed universe, have slipped at least 25 per cent over the year, and about 480 - more than a fifth of the listed space - are down 50 per cent or more... In contrast, over the year, about 340 stocks (15 per cent of the listed stocks) gained 10 per cent or more, about 220 (less than 10 per cent of the total) rallied 25 per cent or more, and just 40 doubled or more. 

Or this from Arati Krishnan,

Analysis on the shareholding patterns of listed companies (Capitaline) shows that from end-2013 to end-2019, the market capitalisation of Indian stocks expanded from ₹70 lakh crore to ₹157 lakh crore fuelled both by new flows and rising stock prices. In this period, the share of FPIs in the free float market capitalisation rose marginally from 39 to 40 per cent, while insurance companies saw their shares dip from 12 per cent to 9 per cent. Direct public holdings were flat at 16 per cent. But mutual funds in this six-year span saw the market value of their equity bets jump more than fivefold from ₹2 lakh crore to about ₹11 lakh crore, doubling their share in the free float market cap from 7 per cent to over 15 per cent... by December 2019, nearly ₹8.5 lakh crore of MF equity assets were parked in the top 100 stocks and ₹1.9 lakh crore in the next 150 stocks, with just ₹0.60 lakh crore in small-caps. Effectively, between September 2017 and now, MFs have withdrawn money from the rest of the market to plough it into the top 250 stocks. A good 77 per cent of MF equity assets are now in large-caps...

A handful of Nifty50 stocks began to forge ahead of other large-caps from 2017 onwards, prompting many fund managers to further narrow their choices. As a result, of the ₹11 lakh crore equity assets managed by mutual funds in December 2019, Nifty stocks alone accounted for ₹7.4 lakh crore (68 per cent). This has climbed from ₹4 lakh crore (58 per cent) in September 2017. Pension fund investments in the indices have also added to this trend. Other institutional participants have also followed a similar playbook. FPIs from September 2017 to December 2019, raised their holdings in the top 250 stocks from ₹22 lakh crore to ₹27 lakh crore while pruning small-cap bets from ₹2.2 lakh crore to ₹0.76 lakh crore. Insurers have ₹6 lakh crore invested in the top 250 and just ₹0.10 lakh crore in the rest of the market.

How much of these numbers are due to re-allocation by fund managers and how much due to mere changes in the market valuations?

As to the drivers of the stock market gains,

One big differentiator last year, apart from the improvement in liquidity, was the corporate tax cuts. They were the single biggest driver of market returns last year. “The Nifty 50 index’s entire return for 2019 has come after September 19," Kotak’s analysts said.

As to the beneficiaries from the corporate tax cut, see this from the latest Economic Survey, 

An analysis conducted by Tax Policy Research Unit (TPRU), based on income tax return (ITR) data of corporates for the financial year 2016-17, points out that most of the companies (99.1 per cent) have a gross turnover of below ` 400 crore (say small and medium companies) and are already taxed at the base CIT rate of 25 per cent. With surcharge and cess, their MMR varies from 26 per cent to 29.12 per cent. On the other hand, only 0.9 per cent of the companies i.e. 4,698 companies have gross turnover of over ` 400 crore (say large companies) and their MMR varies from 30.9 per cent to 34.61 per cent. Thus, the impact of CIT rate cut varies from gain of about 3.2 per cent to 13.5 per cent of the existing tax liability for small/medium companies to about 18.5 per cent to 27.3 per cent of the existing tax liability for large companies.

The equity markets are a major contributor to the widening of inequality in the developed countries. Nowhere is this more pronounced as in the US, where markets have been surmounting new peaks, despite all the gathering uncertainties. 

Sample some very interesting graphics from the Twitter feed of Robin Wigglesworth on a Goldman report on how the low interest rates induced asset prices is widening inequality. See this

Since 1990, the top 1% of Americans has bought $1.2 trillion of stocks, while the remaining 99% have sold $1 trillion, according to Goldman Sachs. Concentration of household equity ownership among the wealthiest households is also at an all-time high.

Equity allocations by the top 1% of households have been rising and are at their all-time highs...

While the top 1% wealthiest households allocate 61% of their assets to equities, the bottom 50th-90th percentile allocates just 12%.

The taxation structure on different categories of incomes is a great example of how widening inequality leads to political capture that sets rules of the game in the favour of the rich.