Vijay Kumar Gaba

If you can look into the seeds of time, And say which grain will grow, and which will not, Speak. (Shakespeare, Banquo -Scene III, Act I, Macbeth)

The past three years have seen an intense war between the forces of “Greed” and “Fear” in the financial markets. Both the forces have won some battles and lost some. Though the benchmark indices close to their all-time high levels might give an illusion of decisive victory of for the forces of “Greed”; but the negative market breadth, poor volumes, declining participation of the domestic institutions, net selling by the foreign institutions and underperformance of the broader markets in the past one year indicate that the forces of “Fear” have not yielded much ground.

The period 2020-2023 has seen some localized bubbles in the markets, e.g., new age businesses (ecommerce, digital payments, gaming etc.), healthcare (Covid spending) and metals (supply shortages); which have been duly normalized without much damage to the overall market structure. For the 3yr period, the NIFTY IT is still yielding an absolute return of 93%; Nifty Metal is up 166% and Nifty Pharma is up 60%.

There have been two major drawdowns in the benchmark Nifty. The first one was the panic fall due to the outbreak of Pandemic (33% fall during February 2020 to March 2020), which was fully recovered in the next 8 months by November 2020. The second drawdown was due to the geopolitical tensions in Europe (16% fall during January 2022 to June 2022), which was fully recovered quickly in the next five months by November 2022.

For the period of three years, the broader markets are still sharply outperforming the benchmark Nifty. The Nifty Midacp100 is higher by 95% and Nifty Smallcap 100 is higher by 79% as compared to the Nifty50 which has gained 55% in the past 3 years. However this ought not be construed as a decisive victory of the forces of Greed. The anecdotal evidence suggests that numerous new investors who entered the market (or increased their participation materially) in late 2020, may have materially underperformed the benchmark indices; even losing their capital in many cases. Unmindful leverage, excessive trading, ill-advised exposure to poor quality businesses and/or new age businesses at unsustainable price levels may have caused them to underperform or lose capital.

Sharp decline in the value of cryptocurrencies in the past couple of years, almost no return in gold and very poor return in the debt has also impacted the investors’ sentiments in the past one year particularly.

Standing at the threshold of the New Year 2023, both the forces appear tired and looking for fresh supplies. The forces of fear are anticipating a full blown global recession and sharp decline in the global risk appetite; whereas the forces of Greed are looking for a managed slow down followed by a full recovery.

In the context of India, the forces of fear are expecting a full blown balance of payment crisis, higher fiscal deficit, de rating of PE multiples due to failed earnings recovery, and abortion of nascent capex cycle. On the other hand, the forces of Greed are relying on continued government support to capex, strong flows on economic outperformance and stable financial system, peaking of inflation and rate cycle, lower energy prices, fair valuations, and earnings surprises to support their cause. It will be interesting to see how the battle evolves.