Is the bull run over?
On December 18, 2017, as the results of the Gujarat assembly elections started coming in, market indices Sensex and Nifty crashed 2 per cent in a span of 15 minutes when it looked like the BJP might lose the state. Later, as it became clear the BJP would stay, the market recovered and stabilised.
Narendra Modi's government is seen as being market-friendly. The manic-depressive market behaviour we saw in those 15 minutes is likely to be repeated over and over, on a larger scale even, over the next 15 months as elections are held to eight more state assemblies and the Lok Sabha. There's a new worry, though, that for all its market-friendliness, this government might turn increasingly populist as elections draw nearer. The Union budget was a good barometer of this intent.
After a bull run that lasted for over a year, the stock market crashed after the budget, and has been down since. The narratives explaining the change of mood are wide-ranging. Some blame it on 'what's happening in America' and others on 'a populist budget', which made large outlays for food procurement and rural infrastructure while also 'raising the tax burden on investors' (via the imposition of a 10 per cent tax on long-term capital gains, or LTCG, in equities).
You'll hear equally wide-ranging projections for the future. One chain of logic is based on the improvement in companies' earnings growth, which offers hope the market will soon recover and rebound. But the naysayers point towards macroeconomic weaknesses-higher fiscal and current account deficits, lower indirect tax collections, rising bank NPAs etc.-which could lead to a collapse of equity values.
Foreign portfolio investors (FPIs) will look at both rhetoric and data-as well as policy moves. Their attitude to India will be coloured by these variables and they will compare opportunities across other markets as they always do. But market volatility will be amplified by the growing importance of the retail investor. While electoral outcomes do influence institutional investors, they cause massive kneejerk responses from individuals. And, when it comes to influencing the Indian stock market, the emotions of the aam aadmi have never been as important as at the present moment.
In the past three years, retail investors have pumped more money than ever before into the stock market, which was a big driver of the bull run. Between January 2016 and January 2018, mutual fund equity assets under management (including ELSS and ETFs) rose fromRs 3.97 lakh crore to Rs 8.6 lakh crore. Roughly half that money belongs to retail investors.
If we look at the regional dispersion of new folios opened by mutual fund investors, a lot of the inflows are from non-traditional locations, including smaller B and C towns. At the possible risk of oversimplification, this wide dispersion suggests that the profile of the individual investor now more closely mirrors the disparate concerns of individual voters.
In addition to buying equity mutual funds, retail investors have also bought stocks directly. The direct investments have led to a broadening of the bull run since individual investors also buy small cap stocks that institutions don't even track, let alone invest in. This has led to eye-poppingly high valuations for small-caps. Meanwhile, over the past two years, domestic institutions (DIIs) have bought a net Rs 1.3 lakh crore, outpacing FPIs, who bought a net Rs 85,601 crore in the same period.
As long as the retail investor keeps faith with the stock market, the bull run will continue because robust DII investments as well as direct retail investments will offset any FPI selling. But if the retail investor decides to taper his equity exposure, the market will go down regardless of the institutional attitude. A retail selloff will lead in the first stage to a narrowing of the bull run after which the mutual funds could be forced into selling bigger stocks, if redemption pressures build up, thus pushing down the major indices.
Individual investors are driven by emotion, and political change will affect their investment attitudes. The opinion polls and recent election results (read: Gujarat, Rajasthan) indicate that there has been some erosion in support for the BJP. It will be a roller-coaster ride for the stock market until the next prime minister is in office.
You'll hear equally wide-ranging projections for the future. One chain of logic is based on the improvement in companies' earnings growth, which offers hope the market will soon recover and rebound. But the naysayers point towards macroeconomic weaknesses-higher fiscal and current account deficits, lower indirect tax collections, rising bank NPAs etc.-which could lead to a collapse of equity values.
Foreign portfolio investors (FPIs) will look at both rhetoric and data-as well as policy moves. Their attitude to India will be coloured by these variables and they will compare opportunities across other markets as they always do. But market volatility will be amplified by the growing importance of the retail investor. While electoral outcomes do influence institutional investors, they cause massive kneejerk responses from individuals. And, when it comes to influencing the Indian stock market, the emotions of the aam aadmi have never been as important as at the present moment.
In the past three years, retail investors have pumped more money than ever before into the stock market, which was a big driver of the bull run. Between January 2016 and January 2018, mutual fund equity assets under management (including ELSS and ETFs) rose fromRs 3.97 lakh crore to Rs 8.6 lakh crore. Roughly half that money belongs to retail investors.
If we look at the regional dispersion of new folios opened by mutual fund investors, a lot of the inflows are from non-traditional locations, including smaller B and C towns. At the possible risk of oversimplification, this wide dispersion suggests that the profile of the individual investor now more closely mirrors the disparate concerns of individual voters.
In addition to buying equity mutual funds, retail investors have also bought stocks directly. The direct investments have led to a broadening of the bull run since individual investors also buy small cap stocks that institutions don't even track, let alone invest in. This has led to eye-poppingly high valuations for small-caps. Meanwhile, over the past two years, domestic institutions (DIIs) have bought a net Rs 1.3 lakh crore, outpacing FPIs, who bought a net Rs 85,601 crore in the same period.
As long as the retail investor keeps faith with the stock market, the bull run will continue because robust DII investments as well as direct retail investments will offset any FPI selling. But if the retail investor decides to taper his equity exposure, the market will go down regardless of the institutional attitude. A retail selloff will lead in the first stage to a narrowing of the bull run after which the mutual funds could be forced into selling bigger stocks, if redemption pressures build up, thus pushing down the major indices.
Individual investors are driven by emotion, and political change will affect their investment attitudes. The opinion polls and recent election results (read: Gujarat, Rajasthan) indicate that there has been some erosion in support for the BJP. It will be a roller-coaster ride for the stock market until the next prime minister is in office.
Comments
Post a Comment