India’s equity markets are represented by numerous indices as a yardstick to measure generic investment returns from investing in the region. However, there are some observations into these indices that investors should consider, particularly if considering a long-term investment into the region.

Developing economies are more influenced by their Government and Central Bank policies and Government spending and initiatives. This more often has a direct impact on supply and demand economics, which maybe be quite different across various industries. It is also more likely to dictate the business cycle and its length, through its impact on savings rates, private investment and capex, product life cycles and level of disruption.

The Nifty, an Index of India’s 50 largest capitalisation free-float companies, is a commonly used bellwether Index to measure equity market performance in the country. It is a free float Index which equates to approximately 60% of overall market capitalisation. India’s market-cap-to-GDP has traditionally averaged around 0.7x. Therefore, you could say the Nifty captures about 50% of the GDP of India. Despite the Nifty consisting of only 50 of the largest stocks, there are 6,000 plus listed companies of which a 1,000 are liquid are tradeable – an active investors delight.

The Indices quite often create significant concentration at points where the business cycle has already been favourable, with valuations reflecting success via a high market capitalisation relative to the fundamental business, given we often extrapolate success or suffer from last period bias.