A lost year for Indian equities: Sensex delivers 0% returns in 12 months, leaves investors empty-handed

Introduction

Over the past twelve months, Indian equity markets have offered little comfort to many investors. The benchmark BSE Sensex has effectively delivered −0.7% returns, which rounds off to about 0% gain in practical terms. Despite a number of supportive economic and policy measures, market participants are left wondering why the equity rally has sputtered, what underlying causes have contributed to the stagnation, and what the road ahead looks like for returns. This report analyses the key drivers behind this disappointing performance, the implications for investors, and what might be required for a turnaround.

What the Numbers Tell Us

• The Sensex has shown a −0.7% return over the past 12 months.
• Many equity mutual fund schemes have also suffered: about 74% of equity funds gave negative returns over one-year lumpsum investments.
• In contrast, asset classes such as gold have done much better, highlighting a shift in investor preference toward safer or hedged investments. For instance, gold has delivered ~50% returns in rupee terms over roughly comparable time periods.
• Valuations have come down somewhat: trailing P/E ratios for Sensex have declined, and in some reports are at their lowest in over 2.5 years.

Causes of the Flat Performance

Even as India has seen favorable policies and strong macroeconomic signals, several headwinds have kept the equity market from moving upward. Key among them are:

1. Weak Corporate Earnings
   • Growth in corporate profit has been modest, often only in mid-single digit percentages.
   • Input cost pressures (raw materials, logistics, wages) have compressed margins. Demand recovery has also been delayed in many sectors.
2. Foreign Portfolio Investor (FPI) Selling
   • There have been substantial outflows by foreign investors (FPIs) from Indian equities. For example, over the year FPIs have pulled out about ₹1.4 lakh crore from Dalal Street.
   • Contributing factors include better relative returns from developed markets, concerns over currency depreciation, and global interest rate differentials.
3. High Valuations / Limited Upside
   • At times, valuations (e.g., P/E multiples) have been seen as elevated, which limits how much more upside the market has without strong growth.
   • Investors tend to demand higher growth or earnings surprises to justify staying invested when valuations are perceived as steep.
4. Global Uncertainties and Policy/Geopolitical Risks
   • Trade tensions (particularly with the U.S.), global macroeconomic slowdowns, and currency concerns have made foreign investors cautious.
   • Domestic policy uncertainties, such as capex slowdowns (public capital expenditure), regulatory risks, and inflation risk have also weighed.
5. Domestic Investor Behavior and Sentiment
   • While domestic inflows (including via mutual funds and SIPs) have continued, they haven’t been strong enough to fully counterbalance the FPI outflows and weak earnings.
   • Investor caution has meant that gains are being locked in more slowly, and there is a preference for safe assets.

Implications for Investors

The past year’s performance has several lessons and implications:

• For long-term investors, this flat period underscores that high expectations must be tempered by realism: markets do not rally every year, and periods of low or no returns are part of the cycle.
• Portfolios that are heavily tilted toward equities with high valuations may have been more exposed to stagnation risks.
• Diversification across asset classes (gold, bonds, foreign equities) appears to have been especially useful this year.
• Investors relying on short-term returns have likely been disappointed. Those who stayed invested or invested systematically (SIPs) have fared better in cushioning downside risks.
• For mutual fund managers or investment professionals, the challenge has been sorting out which sectors or stocks can outperform in an environment of muted growth, cost pressures, and cautious global capital flows.

What Would It Take for a Turnaround?

Several conditions are likely needed for Indian equities to break out of their current flat trajectory and deliver meaningful returns again:

1. Improved Corporate Earnings
   • A visible recovery in demand across sectors, reduction in input cost pressures, and better margin control.
   • Strong performance in upcoming quarters would help restore investor confidence.
2. Better Foreign Capital Flows
   • Stabilization or strengthening of the rupee.
   • Reduction in global interest rate differentials or risk premia that make India more attractive.
   • Clarity in trade and policy frameworks to reduce perceived risk for foreign investors.
3. Valuation Support
   • Further corrections in valuations could provide a more favorable base, provided earnings growth picks up.
   • Identifying underpriced sectors or companies with strong fundamentals may offer alpha.
4. Policy Actions
   • Government stimulus (monetary or fiscal) that boosts consumption, infrastructure/industrial capex, or reforms in sectors faced with structural headwinds.
   • Regulatory or policy clarity in key areas.
5. Global Stability
   • Reduced geopolitical risk, stable commodities (especially energy), and smoother international trade relations.
   • Any global shock tends to flow into emerging markets like India, often amplifying negative sentiment.

Outlook

• In the short to medium term, analysts are cautiously optimistic. Some believe that the earnings cycle has hit a bottom, and that a consumption-led recovery along with policy tailwinds could trigger a rebound in the second half of fiscal year 2025-26.
• However, risks are real: global shocks, persistent inflation, weak demand, or further foreign outflows could delay or blunt a recovery.
• For patient investors, periods like this may offer opportunity — buying into more reasonable valuations, focusing on quality companies, and staying diversified.
• In the longer term, India’s structural growth story (young population, digitalization, urbanization, policy push in infrastructure) continues to remain intact, which suggests that the stagnation now may be a pause rather than a paradigm shift.

Conclusion

The past year for Indian equities has been underwhelming — the Sensex delivering almost zero returns reflects a challenging confluence of weak earnings, elevated valuations, foreign capital outflows, and global uncertainties. Despite positive policy developments and domestic investor support, the market has not been able to translate these into growth in stock prices in a meaningful way.

Yet, this does not spell doom. Rather, it is a reminder of the cyclical nature of markets, the importance of realistic expectations, and of the conditions that need to be satisfied before equities can deliver again. For those willing to look through the noise and position themselves carefully—diversifying, selecting fundamentally strong companies, observing the upcoming earnings, and watching for positive triggers—there remains scope for recovery and upside.