Why Sebi calling out “irrational exuberance” is good for the market: Raamdeo Agrawal

Raamdeo Agrawal, Chairman and Co-founder of Motilal Oswal Financial Services

The rise in stock prices over the past few months seem to suggest that there is feeling that we are operating in a risk-free market. Currently, there is this universal optimism that stocks will never go down. There is no fear at all among investors. That’s never good and won’t end well, if it continued this way.

That’s why it’s a welcome relief to see the Sebi Chairperson say there are pockets of irrational exuberance in the market. Thankfully, we have regulators who understand markets well this time around. They are very vigilant. And now, they are saying that they are concerned about froth in certain segments of the market; obviously investors should also be concerned about it then. So the recent correction in stock prices is actually very welcome. In fact, if the market falls 10-15%, it will be good for the long term health of the market. Because if you look at this history of market cycles, whenever markets see a parabolic rise, they tend to crash. My only fear thus is that the market should not become parabolic the way it did in 1992 — the first bull run. Those lessons we should not forget.

The first bull run I experienced was in 1985-86. I did not participate because I didn’t have the money but I watched it – it was a powerful bull run. When Rajiv Gandhi and VP Singh combination came into power, the market doubled at that time. But after the first flash of bull run which took Sensex to 800, it came down to less than 400. Then in 1988-89, it started building up again and climbed back to 700-800 range. By March 1992, in 19 months, it scaled up to 4,000. It is the kind of boom that occurred nowhere else in the world, maybe Nikkei did something similar.

Bull markets bring a lot of wealth, but it also dissipates fast if it is not fundamentally led. I say so because by definition a bull market means something where you are overpaying for what you buy or you just get overpaid for something. If it is a fundamentally led rally, then it's not a bull market. You get what you paid for, right? So that's not a bull market. The bull market is something where you get overpaid for what you have or you just get paid for nothing.

In 1992, all the junk companies went through the roof. In 2000, it was driven by tech stocks (tech, media and telecom) which was global trend. The rest of the market was in dumps in 2000, including players like HUL. We made tons of money in Infosys, Satyam, Mastek and so on, but then stocks collapsed again. Stocks became one-third of the their peak value in 2000. Then, 9/11 things happened and markets well into a lull. We thought it was the end of the world. But it started again; the bull run this time was driven by commodities and the vertical rise of China that drove the whole world. Then it ended with the mortgage crisis in the US which led to the global meltdown in 2008.

One important thing is that at all times, whether it is now or earlier, there are always pockets which don’t participate in the rally. Even in 1992, there were some pockets which didn’t participate. This time too, there are pockets which are not fully priced, they will do well. But only a few companies will do well, because valuation of most companies will come back to their long-term averages. So you are going to be disappointed by paying high P/E. Having said that, I do think there are pockets in the market where it has not completely become South Bombay sort of prices.

The other point is all the three bull runs have different colours. I'm sure this current one also will have a different colour. In the bull run after Covid, we have come from 8,000 to 21,000. So we have already done 3x. Assuming the bull run has a 7x increase (that ahs been the case thus far), another 3x is left in this rally. If we cover the remaining half in 3-4 years, we are going to be fine. If we try to do it in 18 months, then we will have a problem. The market should not go parabolic, the value is created linearly. The market value and price should not go in a non-linear way. That is necessary.

In 1992, no one knew what was happening.

But then, at that time there was no Sebi. Now we have a powerful regulator who tracks everything digitally; every single trade is being tracked. I’m sure they will not allow the market to go parabolic.