Opinion | Stock investors not nimble enough yet
When portfolios are down, lay investors are pushed to a point where they can’t bear the pain anymore, so they quit. Everything looks gloomy. In past cycles, the bottom appeared when selling pressure became unbearable and enough value hunters absorbed it at extremely attractive valuations.
Every bull run is followed by a phase of steady decline ending in a massive selling spree. Seasoned investors in small- and mid-cap stocks expected this to happen through most of 2017. But the markets kept rising and these companies traded at a premium to Nifty valuations. This trend was unusual and there were no strong parallels in history. Given the strength of inflows, investors concluded that this was the new normal. Investment appetite seemed strong and unlikely to abate anytime soon. This was the perfect setting for professional investors to accumulate assets. Also, assets under management(AUMs) of popular PMS managers and leading mid-cap funds soared to match the size that only marquee large-cap funds enjoyed in the last bull run. The market’s newbies were creating portfolios which only had exposure to mid-, small- and micro-caps in 2017.
The tide turned in 2018 when the budget brought back long-term capital gains. The markets were craving for a reason to correct and this was the perfect excuse for sentiment to turn. Yet the market still didn’t see a sharp decline. Instead, large-caps rose, taking the index higher during the year. Individual and professional portfolios having a rough time didn’t bother sentiment. SIP inflows, a traditional barometer of sentiment, simply rolled on. Most investors were confident that once large-caps peaked out, it would be the turn of smaller companies to regain their uptrend. But that was not to be.
The year 2019 started with successive bouts of selling in mid- and small-caps. Markets punished every little negative news from overvalued companies. Slowly, investors started losing confidence and were willing to sell. The pain was growing and they knew it would become unbearable. Past cycles had taught market players that much. But there were no buyers and stocks simply collapsed at the exit door. Even professional managers have not been able to stem the tide and their net asset values(NAVs) have been taking a regular knock even while the Sensex and Nifty stayed mildly positive in 2018. Yet in what seems to be unending pain, there’s no sight of a bottom. The usual signal of SIP redemptions remains elusive and the prediction of a market bottom is still waiting to be made. For, in the recent bull run, SIPs have begun to provide constant supply of capital to equities allowing investors to be far more patient than in the past cycles. Notional losses aren’t affecting investors as they previously did and this has spooked conventional thinking on a market bottom. But the last word is yet to be spoken. The current stock universe is deeply divided and we have both largely ignored parts and extremely concentrated fancy ones within indices like NBFCs, FMCG companies and private banks. In fact, the reason for the index rally is the spectacular rally in select stocks. The absence of selling has made these stocks safe havens and investors seem to be scampering to own them to avoid notional losses or NAV drawdowns on their portfolios.
But elections can change the trend as market fancy normally shifts then. Investors usually rush to capture that shift in their portfolios. In 2014, this shift happened away from small- and mid-caps towards large-caps. This was a classic top-down trade which took the market’s complete attention. This year’s election trade could be similar. The benefits of economic reforms under this government will accrue to the next government. But this is still not reflecting in the current investment choices which is overwhelmingly skewed towards private banks, FMCGs, NBFCs and mid-caps. Post election, the market fancy will shift towards large- caps in general and within them to infrastructure, power, steel, capital goods, public sector banks and services companies. Election results will bring in an acute sense of urgency to capture post-poll economic trends in individual portfolios. A top-down trade seems inevitable and investors will want to participate in that.
What SIP stoppages may or may not achieve, this shift in market leadership will ensure. The acute valuation gap between companies will trigger this trend. Global flows could accelerate this market shift. Investors seem oblivious to this as they believe that a change in sentiment will once again revive the valuations of recently fancied stocks and sectors. They continue to own them in the hope of a swift rebound and still seem to be happy sitting on the last cycle’s big winners. When a sense of urgency resurfaces, we could see rapid churn that will puzzle the most seasoned investors. The stocks they least expected to move and avoided owning may well turn out to be the big movers. The reason is simple. Investors are not yet ready to be nimble. Elections clearly will set the house on fire.
Shyam Sekhar is chief ideator and founder, iThought