Liquidity Drives the Stock Market.
Headine itself makes clear what I intend to share my views on.
In last 4-5 years , stock market have proved that it doesn't need any growth figures to lure investors. Fact that iinvestors are inclined in investing, itself is enough to lure more investors. Investment habit is being gradually imbibed in our country.
Today's young generation and ease of access to investment and stock markets have been contributing factor for decreasing reliability on FII for driving stock market. Yes, in last couple of years, FII dominance on stock market have been reduced. Domestic flows have also showed it's strengths.
Due to increasing investment habit and increasing penetration in our country, fund houses have been under pressure resulting in investment in large cap stock as it would not carry much risk. Hence many large cap stocks have showed good returns.
In last 5 years , Nifty 50 have showed increase in EPS by 21% (Nifty Next50 showed decrease in EPS by 15%) while increase in Nifty50 have increased ~74%. This increase in Nifty50 is driven by liquidity surpassing avg PE ratio of 22. In Aug 18, Nifty PE was at all time high of 28. At that time, Nifty50 was fundamentally overpriced forcing Nifty to come down from 11800 to 10500 levels. At avg PE of 22, Nifty should be at 9100 levels.
Liquidity driven stock markets carry it owns risk of volatility. Volatility will be complimentary when stock market is driven by liquidity. However, only good liquidity in stock market can give good return in long run.
Liquidity - The Holy Grail !