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Greed is not always good – how to make sense of the current market

Many factors that are being cited as the cause of increasing volatility have been around for some time. Greed is the dominant sentiment

October 07, 2021 / 05:17 PM IST
Representative image (Source: ShutterStock)

Representative image (Source: ShutterStock)

This financial year started with the country reeling from the devastating second wave of the COVID-19 pandemic.

Images of citizens struggling for life-saving drugs or gasping for oxygen, and cremation grounds and graveyards crowded by mourning relatives were all too common. Disease, death and desperation dominated the popular media narrative.

At the start of the pandemic, the government went into overdrive to build health infrastructure, provide assistance to helpless citizens and planned what would eventually become the biggest public vaccination drive in the history of mankind.

Austerity and fiscal discipline were temporarily set aside.

The recovery from the second wave

Close

Macroeconomic data for the first quarter of the financial year showed consumers hadn’t stopped spending.

Private consumption was the largest contributor to growth (India’s economic output adjusted for inflation grew 20.1 percent compared to a contraction of 24.4 percent in the same period last year) and the government had refrained from spending too much.

Growth was better than most had anticipated because the sporadic lockdowns during the pandemic did not affect economic activity.

Recovery in the second quarter of the fiscal year 2022 appears to be much better than estimates with many indicators reaching pre-pandemic levels.

Growth estimates for the current financial year have been revised up by most agencies.

Marching to a different beat 

Financial markets have not reflected the popular narrative.

The stock market has witnessed heightened activity, with benchmark indices gaining close to 20 percent in the first half of 2022 on the back of much higher participation by household investors. Mid- and small-cap stocks dominated market activity, indicating the strong dominance of the sentiment of greed over the sentiment of fear

Several concerns for equities

The market rally has been rather intriguing, given that environment for equities has not been very supportive from the viewpoint of conventional wisdom.

The following factors have bothered the equity markets for some time.

- Energy prices (the Achilles’s heel of the Indian economy) have climbed sharply higher. The second round impact of energy inflation has also become visible in higher costs of production and freight.

- Food inflation has persisted at elevated levels. In fact, headline inflation has persisted above the Reserve Bank of India’s comfort zone for many months, terminating any chance of further monetary easing by RBI. The debate now circles around the tightening schedule of RBI.

- The vulnerabilities of the Chinese financial system were exposed with Evergrande, one of the largest real estate developers in the world, defaulting on its debt obligations.

Also Read: Analysis | Evergrande and its likely positive implications for India

- Central bankers of developed countries gave clear signals that the monetary easing has peaked and their next step would most likely be monetary tightening.

- RBI has shown tolerance for higher yields and a slightly weaker rupee.

- Institutional investors have remained on the fringes for the most part of the first half of this financial year

- The cold war-like condition between the US and China has intensified.

- The situation at northern borders remains alarming, with no resolution in sight for the Sino-Indian standoff at the Line of Actual Control and the increasing influence of China and Pakistan in Afghanistan.

- The weather has been extremely erratic the world over -- unusual snowfall and drought in Latin America, drought, extreme heat and wildfires in North America, floods in Europe, China and the Indian subcontinent caused extensive damage to crops and supply chain disruptions. The prices of industrial raw materials and food increased materially.

- Corporate earnings have been stronger than the estimates in the first quarter of the financial year, but the valuations in many pockets are seen as prohibitively high. The valuations in commodity sectors like metals and chemicals seem to discount the current inflationary trends.

Regardless of the presence of these factors, the equity markets have remained quite resilient so far. However, in past couple of weeks the volatility in markets has increased significantly. While many pundits have attributed the rise in volatility to one or more of the above listed factors; it is pertinent to note that some of these factors have been present for many months. It would therefore not be justifiable to attribute the market volatility and jitteriness to these factors alone.

Greed is the dominant sentiment

Anecdotal evidence indicates that in view of the above-listed factors, the participation in equity markets in the past six months has been rather tentative and lacking in strong conviction. Most investors appear to be actively trading, frequently booking small gains/losses. Thus, even though the benchmark indices have shown strong gains in the first half of this year, not many personal portfolios may be showing matching gains.

Now, as the market commentary turns to “cautious optimism”, “fairly priced”, and “Long term Story intact” from “abundant opportunities”, “recovery trade”, “TINA for India” etc., the unconvinced investors/traders lacking in conviction are turning even more nervous. Of course, greed is still the dominating factor and not many market participants are taking money off the table; they just quicker in booking profit and losses.

Sector shopping in search of quick gains is also gaining higher momentum leading to faster sector rotations, giving an illusion of abundant trading opportunities. Obviously, the money in the pocket is not reconciling with the money being made on social media timelines. Money made on Twitter timelines is exponentially higher than what the broker’s statement is depicting and that is making the investors/traders both nervous and greedier. So expect the current state of volatility and low returns to continue for a few more months at least.
Vijay Kumar Gaba is Director, Equal India Foundation.
first published: Oct 7, 2021 05:16 pm

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