Modi Rally, Recency Bias and Indian Stock Market Returns
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One could argue that the so-called 'Modi Rally' in Indian stock market started in December of 2013. It may be recalled that the then Gujarat state chief minister Narendra Modi was elected as Bharatiya Janata Party's (BJP) prime ministerial candidate in September of 2013.
Perceiving him to be 'business-friendly,' the Indian stock market started rallying in the last quarter of 2013, that is, between October and December of 2013. Prior to December 2013, Indian stocks remained subdued for a long period.
Many investors and traders have this notion that Indian stock market has been doing well during prime minister Modi regime that started in May of 2014. Many retail investors (including small and high-net-worth individuals) are of the opinion that the so-called Modi Rally is beneficial for stock market.
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This feeling is especially pronounced since the middle of 2020 and continues even now as Indian investors are biased by the recent returns they enjoyed, particularly taking higher exposure to small-, mid- and tiny-cap stocks--which entail higher risks as compared to large-cap and quality stocks.
In psychology, this is referred to as recency bias. Our minds perceive things more favourably with recent events. As investors and traders have enjoyed decent to spectacular returns for almost two years in the recent past, they continue to consider PM Modi to be good for Indian stocks.
But when we look at the data, we get a different impression from the favourable notion they have of the Modi Rally. For the record, the benchmark Sensex index generated a CAGR (compounded annual growth rate) or annualised return of just 13.5 per cent in the past eight years since the start of Modi Rally in December 2013 and till now, that is, till the end of December 2021.
Nifty 50 index too delivered the same CAGR of 13.5 per cent in the same period, while the BSE 200 index delivered a slightly higher return of 14.6 per cent. If you adjust these returns down with the actual inflation (which is between eight and 10 per cent per year--as you know, the official data are manipulated) suffered by people, the returns are not good.
Table: Calendar Year Returns of BSE Sensex, Nifty 50 and BSE 200 indices - 2014 to 2021 - CAGR returns for various periods >
On a three- and five-year basis, the returns look decent as they include the superior returns of 2020 and 2021. If you look at the calendar year returns, you may have observed that investors had suffered for four years in 2015, 2016, 2018 and 2019 with below-average returns.
The returns provided here are price returns (not total returns that include dividends). You can adjust the above figures with a dividend yield of between 1 and 1.5 per cent for the dividends. At the index level, Indian investors don't get much dividend yields these years.
Undoubtedly, some mid-cap and small-cap stocks have done exceedingly well in the past eight years between 2014 and 2021--especially in 2014, 2017, 2020 and 2021. You may check my article 'BSE Broad and Sectoral Indices Returns' with the latest information updated as of 31Dec2021.
It is always a good idea to check our perceptions and notions with the reality of unbiased data and opinion.
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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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He blogs at:
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Twitter @vrk100
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