Moneycontrol Pro Panorama | Markets need their Vitamin D too, as disclosures make them stronger

Gainers & Losers

Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of. 

A recent study by Tata 1mg Labs revealed that 3 out of 4 Indians suffer from Vitamin D deficiency. Inadequate exposure to sunlight is a primary factor. Vitamin D is critical to a healthy and active life and to keep diseases at bay but we are here to discuss another Vitamin D -- Disclosures.

In every way, a healthy and vibrant capital market also needs its dosage of Vitamin D through regular disclosures of pertinent information. Indeed, information asymmetry is a big reason why markets become inefficient, illiquid, and sometimes even illogical.

Disclosures were at the centre of the Securities and Exchange Board of India’s (SEBI) move to instil some caution into the equity market. SEBI has mandated that mutual fund houses must conduct a stress test of their funds and publish this information for the benefit of investors. We explain here what are these stress tests and my colleague N Mahalakshmi explains lucidly here the importance of these stress tests.

These stress tests assess the liquidity profile of funds, which is a very important aspect. At times of sudden redemptions when investors want their money back, the stress test will reveal how fast a fund manager can liquidate holdings and honour these redemptions. As our Wednesday’s Panorama explained, fund houses are increasingly handling household savings and the equity market is not just an institutional play anymore as shown by the surge in demat accounts and systematic investment plan (SIP) inflows into mutual funds. What happens to the retail investor determines how much money capital markets will get in future. After all, policymakers want household savings to chase productive economic activity and not just sit in just physical assets. Greater financialisation of savings hinges on confidence that a retail investor has in the market.

This confidence has taken a beating this week after mid and small cap stocks tanked following SEBI’s warning on them. To be sure, regulatory warnings were necessary and more so in these segments as mid and small caps are notorious for low liquidity and hence, vulnerable to transgressions. The fact that alleged hawala operator Hari Shankar Tibrewala's involvement has only added to the unease among investors. The volatility in mid and small caps and the recent surge in valuations to stratospheric levels does not help.

At such times, retail investors will get confidence only when they have access to unbiased and true information through disclosures. In this aspect, the first set of stress tests thankfully show that fund houses don’t seem to be in deep water when it comes to small and mid cap stocks. At the same time, as Lisa Barbora reminds us in her column that stress tests during normal market conditions may not necessarily reveal the true heft or lack of it of any fund.

Ananya Roy in her column explains that warnings may have dampened sentiment, but investors can look at corrections to shop for quality stocks, given that the Indian growth story is still strong.

The question remains though, to what extent are fundamentals offering a cushion to the recent surge in valuations? Can we trust fund managers to use discretion while dealing with risky bets on small companies? The answers to these are not straightforward, but at no point does the answer lie in covering up the harsh facts. As far as disclosures are concerned, let there be more light, not less.

Investing insights from our research team

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Royal Orchid Hotels: Why should you bet on this hotel stock, post correction?

Weekly Tactical Pick: Is this PSU stock a rock or a diamond?

Protean Tech: A unique play on rising digital wave at attractive valuation

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Governments running entertainment OTT: Is it reel or their role?

Tim Harford: Why Swifties, holidaymakers and the hygienic should cheer for surge pricing (republished from the FT)

Aswath Damodaran: ‘Investing is an act of faith’ (republished from the FT)

Five ways India’s next growth cycle is different

Indian economy has made it to the launchpad. It still needs a spark

The trouble with narratives like Japan is back, China is over

Japan Carmakers: Speed up consolidation to compete with China’s EVs

India needs to rally behind its edtech startups, beginning with Byju’s

Personal Finance

The great small cap fall and the way forward

Markets

Mutual funds cut stakes in frothy PSUs as large undervaluation vanishes

Tech and Startups

Home ministry empowers I4C to send takedown orders to platforms

Technical Picks: Crude oil, HDFC Bank, Hero MotoCorp and Bharti Airtel (These are published every trading day before markets open and can be read on the app).

Aparna Iyer
Moneycontrol Pro