Kotak's note finds narrative-focused NFOs led to ‘price-insensitive’ bids, unreal valuations

A Kotak Institutional note has underlined a series of 'short-lived, narrative-driven' stock themes in the market in recent years - PSUs, defence, railways, or capex plays to name a few - that have sustained fresh inflows and higher returns. Money in these ideas has jumped from one narrative to another, helping the stock market scale fresh highs and offer investors higher returns, the note has said.

In its note to investors, Kotak Institutional mentions how narratives have tried to capture the market's attention. "We note that narrative-driven valuation re-rating has been the primary driver of returns over the past 12-18 months. However, a few narratives of the past few months such as ‘400+ seats for NDA’, consumption or rural boost in the budget, increase in capex allocations, especially in defense, railways, roads, and privatization of PSUs have failed to materialize."

The Kotak Institutional note has observed a rise in thematic NFOs by mutual funds, focused on a particular sector, in order to attract greater flows. This forced deployment of NFO collections irrespective of price and underlying valuations has resulted in ‘price-insensitive’ bidding for stocks, taking them to unrealistic levels in several such ‘narrative’ sectors, Kotak said.

Between May and July this year, sectoral or thematic funds have accounted for nearly half of
the Rs 1.12 lakh crore raised by domestic mutual funds.