"If you can crack this puzzle for me, I would fly down here (India) all the way from the US to understand it," said the former Chief Economic Adviser, Arvind Subramanian.
During the inauguration of 'NSE Centre for Behavioural Science in Finance, Economics and Marketing' at IIM Ahmedabad in December 2019, the CEA said "I hope that the first behavioural economics project of this Centre would be to explain to me why as the economy is going down and down and down, the stock market is going up, up and up".
Since that day in December 2019, Nifty50 index rose from 12,223, went on to hit an all-time high of 12,430.5, dropped all the way down to a 52-week low of 7,511, to finally end the financial year at 8,598, a steep fall of 29.6 percent in less than 4 months. Though this fall could be attributed to the uncertainty emerging due to corona virus pandemic and the resultant lockdown affecting businesses and sentiment at that time, some investors & economists would lay a claim, saying that the stock markets are finally falling, in line with the economic performance.
SBI Research in its recent economic report estimated a GDP growth of 1.2 percent for Q4FY20, taking the FY20 GDP to 4.2 percent, probably a decadal low, while Nifty50 CAGR for the decade (FY11-20) stands at a mere 5.06 percent.
Stock Market versus Economy
Many experts have tried, many times, to correlate stock market and economic performances with credible and justifiable explanations. At best, stock market is a sentiment indicator of the economy. The Indian stock markets account for business performances of merely 6,000 listed entities on BSE and 2000 odd on NSE, whereas economic activity encompasses millions of businesses and their collective performance.
Also, unlike investors in other countries, majority of Indian investors always sought gold and real estate as reliable sources of investment, followed by fixed deposits and insurance. Owing to lower awareness and higher risk perception, retail participation in equity investments was very low earlier and mostly considered the domain of institutional investors and fund managers – foreign and domestic.
Consider this, between FY11 and FY15, FII net investments in cash segment accounted for Rs 3.07 lakh crore while DII net investments stood at Rs (-) 1.60 lakh crore. This corresponds to a Nifty50 CAGR of 10.1 percent over the 5-year period. However, these narrow notions of Indian retail investors witnessed considerable change over the last 5 years.
With interest rates continuously trending lower and returns from small savings schemes being linked to market rates, traditional investors have tried to bridge the returns gap by investing in mainstream financial assets. With the emergence of online brokers, investor awareness programs, continuous stream of Initial Public Offerings (IPOs), investors took a leap of faith by moving into trading and investing in equities, commodities and even currencies.
The transformation is remarkable. Between FY16 and FY20, as FIIs sold equities, DIIs continued to invest, supported by retail investor’s money. The rise in number of demat accounts is a testimony to the investors’ interest. As per SEBI data, between FY11- FY15, demat accounts rose from 190 lakh to 233 lakh only. But, between FY16-FY20, the rise in new additions is dramatic.
Around 12 lakh new investors opened demat accounts with Central Depository Services (CSDL), equally spread across March and April of the current calendar year. This surge, ascribed to availability of free time due to work from home concept arising because of continuous lockdowns, is significant in comparison to the 44 lakh demat account additions in the balance 11 months of FY20.
Based on data from Association of Mutual Funds of India (AMFI), similar situation was witnessed in mutual fund investments too, where almost 16 lakh new SIPs were registered in March and April alone, with steady SIP amount contributions all-round the year. There were 89,746,051 accounts in the mutual fund industry as at March 2020, of which 89.9 percent was accounted for, by retail investors.
Is this upswing in investor interest here to stay? There are quite a few positives, and negatives as well.
•>> Work from home concept has turned universal, as risk of corona virus infections continues to persist due to unavailability of a standard treatment protocol or vaccine at hand, providing sufficient time. But disposable incomes could possibly be hit due to job losses or pay cuts, resulting in investors opting for safer investment avenues, to conserve cash.
•>> Reports of positive results during pre-clinical trials and rising infections on a daily basis has resulted in sufficient volatility with major indices experiencing wild swings. For a professional trader, the situation may be ideal but for an amateur, there would be hard lessons in the offing. Manage risk, not returns.
•>> A negative GDP growth is factored in for Q1FY21. In case, the situation on the Corona Virus front improves and lock down gets cleared, it would act as a sentiment booster for markets to move up. However, with lower fiscal stimulus and insufficient cash spend by the government, the risk of a delayed economic recovery could dampen the spirits, affecting stock market performance.
•>> Most indices have corrected significantly and many stocks across sectors are a value play at this point in time. Investors with a horizon of 3-5 years would find excellent opportunities to invest in healthy companies backed by credible & strong financials, good corporate governance and better future prospects in a post COVID-19 world.
With enticing stories of extraordinary returns being posted on social media from time to time, investors are lured into the world of equities, where insufficient understanding can wipe out one’s cash, retirement benefits and even claim lives. The lure of quick money poses clear and present danger. It is up to individual investors, to understand the difference between throwing away good money based on anonymous stock tips versus investing based on sound principles and a well-defined philosophy.
Stock markets run on optimism, but it doesn't imply that an investor has to forget his arithmetic. Unfortunately, the lure is too much to resist at times.
The author is Co-founder & CEO at FYERS.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.