Can Bulls Defy Precedented Bears? Caution Ahead For Retail Investors
It's essential for retail investors to consider certain nuanced facts and paradoxical perspectives before taking euphoric long positions in the stock market
The year-end of 2023 marked a historic moment for the Indian stock market as benchmark indices Nifty and Sensex reached unprecedented highs of 21,000 and 70,000, respectively. Market stakeholders, including mutual funds, foreign institutional investors (FII), domestic institutional investors (DII), retail investors, and traders, celebrated these new highs with bullish sentiments.
Despite recent challenges such as geopolitical tensions from the Israel-Hamas war, rising crude oil prices, hawkish stances from the US Federal Bank, tightening guidelines on consumer loans by the Reserve Bank of India (RBI), and net outflows, the market defied these setbacks.
Landmark events included Bombay Stock Exchange (BSE) listed firms surpassing a USD 4 trillion market cap, making it the fifth-largest globally. Optimism is high, with expectations that the Indian stock market will surpass the Hong Kong stock exchange to rank sixth globally.
However, the market's potential doesn't overshadow its past performance, prompting nuanced observations and recent concerns from various quarters.
For retail investors seeking long-term returns and influenced by current commentary or having a naive understanding of the markets, it's essential to consider certain nuanced facts and paradoxical perspectives before taking euphoric long positions in the stock market.
For instance, while the Sensex's compounded annual growth return (CAGR) over 44 years is 17 per cent, this CAGR is inflated due to massive returns during specific periods, such as the 262 per cent returns during the Harshad Mehta Scam of 1992, the 86 per cent returns of the 2004 bull run, and the April 2010 recovery returns after the financial crisis, as well as post-COVID recovery returns of 78 per cent and 77 per cent, respectively. Excluding these top five returns would drastically reduce the 44-year CAGR to 5.8 per cent.
Similarly, the Nifty's ten-year returns from 2010 to 2020 stood at around 115 per cent, resulting in a CAGR of merely 9.75 per cent. In contrast, the year-to-date returns from 2020 stood at around 75 per cent, leading to a 15.75 per cent CAGR outcome.
VLA Ambala, Research Analyst and Founder of Stock Market Today, stated, "While exceptional market rallies like the one witnessed between 2000 and 2008 can significantly boost the CAGR, they are not guaranteed to occur regularly. However, the Indian economy is expected to continue growing in the long run, driven by factors like a young and growing population, increasing urbanisation, and rising disposable incomes. This long-term growth trend is likely to be reflected in the stock market, albeit with periods of volatility and occasional corrections."
Ambala emphasised that it's a "Bull Run," and focusing solely on this period can be misleading. Taking a longer-term perspective reveals a 12 per cent CAGR since Nifty's inception, showcasing significant growth despite short-term fluctuations. Additionally, individual stock performance varies, and investors with diversified portfolios likely witnessed higher returns during this period.
IPOs Blazing
Similarly, the present rally is also attributed to certain domestic and global factors such as IPOs. Whether it is a mainboard IPO or SME IPO, the majority of them are listing with exuberant gains. Recent mainboard IPOs, such as Tata Technologies and IREDA, performed well. Tata listed with a 140 per cent premium and IREDA achieved 250 per cent listing-to-date returns in the last trading sessions with consecutive upper circuits.
Divam Sharma, Smallcase Manager and Co-founder of Green Portfolio, stated, "Markets have been super bullish since March, and the momentum has been unstoppable. IPOs are coming at even more than 100 per cent listing gains on the back of strong investor demand. New investors are coming into the markets expecting some quick gains. This can be seen in the number of new demat accounts. These same investors would form part of the retail participation and have a higher appetite for investing in companies with newer business models. Indian corporates are well-positioned and coming up with IPOs to raise funds. These funds would mostly be used for internal growth, capex, or to repay debt."
Indian markets have the largest number of IPOs in the world, and that trend doesn't seem to be stopping. Many new companies, especially in tech and manufacturing, are getting listed. Moreover, companies with newer business models are now approaching the market and valuing such companies is challenging. Eventually, valuations become a product of investor perception, added Sharma.
He further added that in many SME IPOs, the supply is controlled, and valuations exceed fundamentals due to high demand. However, there are also reports about the regulator keeping a watch on price discovery and bump-ups in valuations.
In a recent issue of an SME IPO, Accent Microsell, a book-built issue of Rs 78 crore, received exuberant bids totaling up to Rs 18,000 crore (362 times), which is the highest bids in the history of any SME IPO.
Ambala said, "While the Indian markets reaching all-time highs and IPOs blazing premium listings can be enticing for investors, it's crucial to remember that short-term momentum does not necessarily validate long-term investing. These market movements are often fueled by temporary factors like excess liquidity, investor sentiment, and hype surrounding new listings. They may not reflect the underlying fundamentals of the companies or the long-term trajectory of the market. However, considering the overall scenario today, this is not the case in the Indian Stock Market as of now."
In the matter of IPOs, Madhabi Puri Buch, Chairman of Sebi, also expressed her concern and said, "The level of over-subscription was getting inflated. The price discovery mechanism was being corrupted. This process (pro rata) led to certain unnatural price discoveries. Demand is being inflated because of the way allotment was being done."
Buch clarified that they were attempting to fix a mechanism that was unhealthy as it gave the impression of much higher demand than actually was.
Do Benchmark Indices Depict the True Picture of the Market?
The depiction of Nifty is supported by variables like market capitalisation, which includes the 50 biggest stocks, accounting for around 65 per cent of the overall market capitalisation of the National Stock Exchange (NSE). Its reliability as a market indicator is further strengthened by the huge trading volume of Nifty equities and its sectoral diversification across 12 industries.
Critics counter that Nifty's narrow concentration on large-cap firms obscures the success of small and mid-cap companies, creating a distorted picture of the market's overall expansion. Complicating the process of completely capturing market dynamics are sectoral bias, which mostly focuses on market capitalisation.
Notably, the Nifty’s mid-cap and small-cap have delivered 42 per cent and 50 per cent returns, respectively, outperforming the Nifty and Sensex returns of 15 per cent year-to-date (YTD).
Additionally, the top five Nifty stocks, Reliance, HDFC Bank, Infosys, ICICI Bank, and TCS, which account for around 40 per cent weightage in the index, have remained muted with 5 per cent, 0.2 per cent, -4.3 per cent, 13 per cent, and 10 per cent YTD returns, respectively.
The Aftermath of the 2024 Lok Sabha Election
After the centre-ruling party secured three states in the assembly election, bullish sentiments ignited, leading November to conclude with Nifty's highest monthly gain of 5.52 per cent after 8.73 per cent gains in July 2022.
The next destination is the Lok Sabha election of 2024, for which speculation and prophecies have already been made. However, retail investors should hedge if the prophecies go wrong.
According to a report by Morgan Stanley, it stated that even though stocks are rising ahead of the 2024 Lok Sabha elections, historically speaking, there is a chance that the markets could decline as much as 30 per cent if the election results are unexpected by the market. This suggests that the elections could upset the calm of the Indian stock market.
Morgan Stanley analysts note that a "credible seat-sharing arrangement" by Indian National Developmental Inclusive Alliance (INDIA), the umbrella alliance of the opposition, might polarise the general elections and lessen the predictability of the result in May.
Retail Investors and Mutual Funds
“Despite the current bullish market sentiment presenting a mixed bag for both retail investors and the mutual fund industry, retail investors, susceptible to herd behaviour and limited access to some investments, must be cautious. Mutual funds, on the other hand, benefit from increased inflows, enhanced reputation, and greater bargaining power,” said VLA Ambala.
Asset diversification, effective risk management while allocating a smaller portion to potentially high-risk opportunities like SME IPOs, and staying informed about market news and economic developments are equally vital, added Ambala.
She further added that several key considerations can guide investors through this period of market exuberance. Firstly, it's crucial not to succumb to the allure of momentum. Avoid chasing stocks solely based on recent gains or hype.
“While good returns can be made from these markets, investors should take caution on the heated-up stocks. This will be a stock pickers market with growth, valuation comfort, and diversification being the key factors. Investors should also not shy away from keeping some cash and not be leveraged in these markets. Staggering the allocation will be a good idea for investors in these times,” said Divam Sharma.
