Retail investors show change in attitude
Indian equity markets have reached a certain level of maturity in the last three years
Every bull market comes with its own set of characteristics. In every Bull Run there are some sectors, which hit the limelight and get stratospheric valuation.
In the three years of the Modi-led BJP government, beside the usual sectoral frenzy, the period is marked by another unique feature, change in the attitude of retail investors. When in 2016, for months together foreign portfolio investors were sellers, the broader market kept moving upward, relegating selling to the sidelines.
This is contrast to earlier instances of Bull Runs, when even a bit of selling from foreign institutional investors, use to shake the Indian market to its foundations. But in last three years, a southward correction has had fund managers wait so that they can deploy their money at lower levels and earn for their unit holders.
Since December 2016, when the Bull Run began, the participation of retail investors has been increasing with every passing month. There is month-on-month increase in domestic money, which is coming to equity market, as reflected by flow to domestic mutual funds. It is probably an indication that domestic investors have faith in this government’s ability to turn around the economy.
A large number of retail investors seem to have realised that there is no point in timing the market. They have mostly shifted to systematic investment plan (SIP), leading to continued flow of money into the hand of fund managers. It has created a situation where Indian institutions, which played second fiddle to FPI till a couple of years ago, are now somewhat in a better position.
It is the secondary market, which has seen massive expansion in the number of investors in the last three years. Even the primary market, which was literally dead after the issue of Coal India in 2010, has been revived.
The initial public offering (IPO) of both private and public sector companies getting oversubscribed by 60 times, was practically unheard off in the last many years. The gains on listing, which the investor had nearly forgotten, have come back in the last few months. Sure, there have been a few shocks, which the market has witnessed and withstood during the last three years - Brexit, US elections and demonetisation - but as Indian indices and market rebound demonstrate, Indian equity markets have reached a certain level of maturity in the last three years.
What that means is that panic due to reasons not fundamental to economy or to corporate bottom lines, have become far and few unlike the past, where mere rumours of some regulatory changes were good enough to trigger frequent phases of correction, which could last for months.
It would be instructive to remember, for instance, the way in which equity markets reacted whenever there was a report that money coming through the Mauritius route would be taxed. Now that change in tax laws has actually taken place, the street did not even blink. That is how things have changed in last three years, as regulatory changes have been managed well, without creating unnecessary fears.
But having said that, after three years of Bull Run, some pockets in market have clearly over stretched. The segment where cases of bubble-like situations could come up, are in the small cap segment.
There is no doubt that some economic recovery is underway. Not only are some of the macro numbers reflecting it, but even private sector data points that have come out from the two segments, capital good and FMCG, clearly indicate that things are much better and on the road to recovery.
The FMCG volume numbers have been better on a year-on-year basis. Even large capital good companies have announced that they have seen a decent increase in their order books.
That does not, however, mean that companies, which have never paid dividend in their history, whose tax payments have either been nearly absent and where turnover is dictated by trading than manufacturing, should reach market capitalisation in three digits and price earning multiples of as high as 30, a position they could not aspire to when there was a global equity boom in 2007.
In some cases as the economic recovery gains pace, price earnings multiples, which today appear to be sky high, should automatically come down. It does justify valuation-elevated price levels, but what happens to companies where earnings are not going to recover? So, while it was – and still is - good to be bullish, a dash of caution needs to be added.
Rajiv Nagpal