Indian Equity markets have been on fire after the fall of March/April 2020. They have beaten many comparable indices from emerging economies. People are asking for question as to what’s going on.
Robin Hood type craze in Stock Market: Indian stock markets have soared to record high levels led by gains in index majors, positive trend in global markets and macro factors. Retail investors and mutual funds flush with funds from NFOs (new fund offers) are driving this market despite selling pressure from foreign institutional investors. Sometimes amateurs beat professionals. This is happening in the Indian stock market now. FIIs, often regarded as representing smart money, have been pushed back by the sheer momentum of retail investors.
Corporate Performance: Corporate balance sheets have been significantly strengthened with record equity raise in FY21. On the revenue front, the listed universe is on firm ground with accelerated trend of unorganized to organized, digital super-cycle and sustained cost management.
Government Policy initiatives: Experts expect the government to continue spending on infrastructure and fast track the reform agenda as we have seen with lowered corporate tax rates, PLI schemes, RBI support, strategic divestments and so on. With accommodative financial conditions worldwide, we see the mega rally in risk assets to continue.
Surplus liquidity: Governments / Central banks have printed trillions of currencies to spur the growth. We know that most of the markets are moved by central bankers. This liquidity is finding its way in to Indian Equity market chasing growth which results in too much money chasing few stocks. The current oversupply is also leading to inflation, asset prices increasing, almost negligible or negative yields and low value of money.
Negative or very low Interest Rates: With too much money around, inflation is an obvious result. Real yield (net of inflation) of interest (ten-year yield less CPI) has become negative in many countries (in the US it is -4.77, India 1.87%, China 1.41%1). Most of the EU and North America are negative, whereas EMs is mildly positive.
Available asset classes for Investments: FDs and fixed income assets are giving sub-optimal returns. Real estate has remained stagnant. Liquid asset classes – Equities and Crypto – have been Investor’s favourite. Bullion has been good but has limits. In 1981: 10 gm gold = Rs.1, 800; 1 kg silver = Rs. 2,700 and the Sensex @ 170 points. By December, 2021: 10 gm gold = Rs. 48,000 (26 times in 40 years); 100 gm silver = Rs. 67,600 (25 times in 40 years) and Sensex @ 57,000 points (335 times in 40 years).
Whether India’s time has come? India is showing lots of promise in terms of perception and reality. During recent Diwali bumper Gold sales, increasing GST collection; Corporate profit to GDP ratio at decade high; Exports rise for 11 straight months; Rs. 100 billion in UPI transactions; Card spends hit Rs. 2 lakh crores; New economy companies and Unicorns showcase remarkable innovation. Positive signs include dramatic improvement in infrastructure; Government stepping out of businesses (Air India, LIC listing) and likely to stay out of the way (balance between State control and private enterprise).
Participation by retail investors: New Demat accounts opened in F.Y.20 were 49 lakhs as compared to last 3 year’s average of 43 lakhs and the new demats opened for F.Y.21 was 1.42 crores. This shows increased retail participation in equity markets, thus reducing dependence on FII’s for money inflow in markets. The pandemic-sparked retail frenzy in India’s stock market has gotten even bigger this year as compared to 2020. Individual investors piled more money into equities than foreign and domestic institutions combined for the second straight year. And the gap widened.Net investment by the retail segment in the cash market stood at Rs 86,000 crore as of October in 2021.
SEBI’s T+1 move to add to stock market frenzy: SEBI has shortened the settlement cycle (time taken between selling shares and receiving cash or buying shares and receiving Demat shares). It has allowed stock exchanges to offer T+1 (trading day plus one day) instead of the traditional T+2 settlement cycle, making the regulator the worlds first watchdog to implement such a rule. IPO rush: It is reported that $4 billion was raised in the PayTM, Nykaa and Policybazar IPOs. But more important is that $2.2 billion was on offer for sale in IPOs by existing investors. This activity has made entrepreneurs wealthy, added market cap and allowed wider public participation.
Equity has given some of the finest returns to those who are invested for decades and even more if for generations. The combination of liquidity, growth possibility and legacy aspects are matchless. The mantra of the masters has been: Buy Good (select well quality stock), Track Well (conviction of analysis and regularity) and Sit Tight (patience to hold) – all these are critical.
The aim obviously should be to Protect Capital, look for growth stories & beat Inflation. With the indirect tax called inflation attacking capital, one needs an asset class that beats this monster. The goal of ‘financial independence’ makes people want to be rich before they grow old.
However, risks cannot be ignored and high valuations with very high P/E seem challenging. Many believe that market value and earnings have no correlation. A recently listed company having an annual profit of Rs. 62 crores and Rs. 1 lakh crore market cap, traded at ten times the price of ITC when ITC profits are about Rs. 35 crores per day.
Word of Caution: SEBI has cautioned that the initial public offering (IPO) market price discovery was not as transparent and efficient as secondary market price discovery. Are we in the midst of Dow Theory's last phase in which institutional investors (considered smart money) progressively book profits, while retail investors absorb these volumes and sustain the rally. The inferences drawn from the Dow Theory do seem to be applicable considering the frenzied levels of buying by retail investors in the past couple of quarters. Historically, when valuations get out of sync with the underlying fundamentals, hopes and expectations are 2 distinct riders driving the market upwards in a treacherous territory of greed. This is usually followed by smart money pulling out plugs leading to a sell off or correction.