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ET500 Stories - 2021
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A Streetcar Named Markets


With talks of central banks across the world raising interest rates to curb inflationary pressures, market volatility is here to stay. The message for investors is shun the lure of easy money and focus on broad investment objectives in this richly valued market

"I don't want realism. I want magic! ... I tell what ought to be the truth."

- A Streetcar Named Desire (1947)

The famous lines by Blanche DuBois, the lead character of Tennessee Williams's much-appreciated play, purport the hopelessness of her efforts to pose imagined realism against factual reality. To the observers of the Indian equity markets, the words would seem to aptly echo the current euphoria among retail investors, whether in the primary or the secondary markets.

It is easy not to miss the zest with which the retail quota of most of the IPOs these days gets fully subscribed within hours - in some cases, within minutes - on the opening day, in the hope of earning multi-fold listing gains. Data, however, show that such gains are not even 10% in nearly half the cases. The rising inflows through systematic investment plans (SIPs) over the past few months also show a similar enthusiasm in the secondary market. And, all this amid the increasing market volatility and soaring valuations that seem to fully reflect the medium-term growth expectations. That brings us to the theme of this year's ET 500 edition: swimming through the volatile waters keeping in mind the danger of drowning.

HIGH VALUATIONS

With double-digit returns by the benchmark indices in three consecutive years - around 17%, 11%, and 27% in 2019, 2020 and 2021, respectively - what investors would lack in the new year is the valuation comfort. Companies across sectors that showed resilience during the pandemic, such as IT, pharmaceuticals, metals and consumer goods, trade at record multiples on hopes that their past business momentum would sustain in the medium term. But, the trend in the index of industrial production (IIP) is mixed, with manufacturing showing a slowdown after the festive season. Also, the previous year's low base due to a nationwide lockdown further obscures the picture. In the case of technology services companies, retaining the momentum in new orders, which had propelled due to the swift pace in digitisation projects during the pandemic, while scouting for talent would be crucial.

The other concern is the course of the pandemic. Even though the vaccination drive has covered a majority of the population, the threat of new virus variants and their mutations would persist, affecting foreign fund flow. A combination of high valuations and the emergence of the Omicron variant of the coronavirus has resulted in sustained selling by foreign portfolio investors (FPIs). They have been net sellers in four out of the six months through November, amounting to an outflow of $6.6 billion ('50,396 crore). Of this, a major chunk - worth '33,799 crore - of selling was in November, reflecting the rising intensity of the outflow.

LACK OF ALTERNATIVES

The journey for investors in 2022 therefore would not be easy, especially if the recent wild intraday swings are any indication. But, not taking the topsy-turvy ride in the equity market doesn't seem to be an ideal solution either, given the upward trend in inflation at a time when relatively safer bank fixed deposit rates are at a record low. The one-year fixed deposit rates offered by a majority of the top banks are at around 5% or lower, with an extra half a percentage point for senior citizens. This compares with the Reserve Bank of India's forecast of a 5.3% increase in the consumer price index (CPI) for FY22. The core inflation, which excludes food and fuel prices, may touch 6%, according to some economists. A post-tax FD rate lower than the inflation rate is an ineffective tool to grow savings. Besides, realty, the other popular asset class, has been in a sluggish phase over the past few years. Gold, too, has been range-bound with no meaningful returns over the past 18 months.

At a time when the traditional avenues of saving surplus income are becoming less useful, investors are also compelled to consider health-related costs amid the pandemic with mediclaim and health insurance policies gaining importance. This necessitates a broader framework of individual investment goals.

LURE OF IPOs

In this backdrop, equities despite their risky nature have emerged as the most preferred option, given the strong returns of benchmark indices. In addition, multi-fold returns by some of the IPOs in a short period further adds to the investors' imagined realism. But, while hankering after each and every IPO, they need to face the factual reality. According to ETIG's analysis, out of the 53 mainboard IPOs listed in 2021 till November, 57% either were unable to retain their listing gains or had extended their listing losses in the subsequent trading sessions. Also, just one out of every four IPOs generated listing gains of 50% or more. While only one-third of the IPOs posted 30% or more in listing gains, 47%, or nearly half of them, were not able to earn even a 10% listing gain. This debunks the common belief among retail investors that a majority of the IPOs generate multi-fold returns.

In addition, 40% of companies in the sample earned below 10% return till the second week of December since the listing, while nearly 30% were trading below their offer prices. Keeping in mind that two out of every three companies that were listed in the period had a market capitalisation below '10,000 crore, our story on IPOs focuses on factors to consider while analysing IPOs by small- and mid-cap companies.

THE BIG PICTURE

Apart from company-specific micro factors, investors more than ever also need to pay attention to the macroeconomic trends in India as well as globally. For instance, controlling liquidity in financial markets by tapering down the purchase of government debt papers and raising interest rates is on cards for central banks around the world. According to a recent report by Morgan Stanley Research, India will be among the most exposed economies in Asia to the external funding pressure amid the current account deficit if the US 10-year interest rates rise sharply in a short duration. Such a stance by the US Federal Reserve may also result in more selling by FPIs.

Amid these variables, volatility is bound to remain high in the medium term, which draws our attention to the fundamental investing concept of returns relative to the risks involved. As one of our features points out, risk-adjusted returns gain importance amid rising volatility rather than the chase for alpha or excess returns alone. Another story brings to the fore the need for a bottom-up approach while wading through a richly valued stock market. The latest ET 500 issue also provides a lowdown on sectors such as infrastructure and textiles.

The road ahead seems to be hazier than ever. A clear sense of factual reality and a focus on long-term investment goals are the right tools to stay the course.

Ranjit Shinde