A Rise Of More Than 3.7 Per Cent In Indian Stock Market Will Make It Overtake The UK's In Value - Might Happen Sooner Than You Think

The market capitalisation of India’s stock markets is about to overtake that of the United Kingdom. The capitalisation of all the companies listed on the London Stock Exchange (LSE) stands at $3.59 trillion, while the Indian markets stand at a valuation of $3.46 trillion. The Indian market just needs to rise 3.7 per cent to match the UK in terms of valuations.

With several large initial Initial Public Offerings lined up, Indian markets could certainly shoot ahead of the UK in terms of capitalisation. The companies that are planning for huge IPOs include Paytm, Nykaa, PolicyBazaar, and the insurance behemoth Life Insurance Corporation (LIC). According to reports, LIC will be valued at $109 billion.

The Indian markets have been on a dream run for several years, with the markets breaching the 60,000 points mark recently. In the past five years, the BSE Sensex has doubled, while the UK’s FTSE 100 has returned one per cent on an absolute basis. In the last year, the Sensex has given around 50 per cent returns on an absolute basis, while the UK index has given around 18 per cent returns on an absolute basis.

The rapid rise in the markets has been led by a positive market sentiment combined with liquidity in the system. Retail investors have begun investing in the markets directly and through mutual funds. The increased retail investor activity is corroborated by mutual fund inflow data, stock exchanges, and depository data. The positive sentiment is led by expectations of rapid recovery, no signs of the third wave yet, a rapid vaccination drive and several other factors.

The top ten companies in the Indian markets in terms of market capitalisation have a combined value of more than $1 trillion. They have a combined revenue base of around $205 billion. Reliance industries and Tata Consultancy Services (TCS) alone make up almost 20 per cent of the total market capitalisation.

The ten highest valued companies in the UK have a combined market capitalisation of $1 trillion. However, these companies have combined sales of $461 billion.

The Nifty commands a Price to Sales ratio higher than two, whereas the FTSE 100 has a Price to Sales ratio of around 1.3, according to Bloomberg Data. Similarly, the Nifty is trading at a Price to Earnings (PE) ratio of around 27, whereas the FTSE 100 has a PE ratio of around 18.

Clearly, investors have high expectations of growth from the Indian companies. But, several sectors have not yet returned to pre-pandemic levels, and the stocks have risen at a rapid pace. In addition, some of the largest companies operate in highly penetrated sectors, where growth opportunities are limited. Unless investor expectations come to fruition, the future returns could be dicey.