The life of equity investors appears to be becoming more tense with each passing day, regardless of the indices scaling new highs. This applies more to the professional investors (fund managers etc.) as compared to the individual investors. I gather from my conversations with the professional investors that they are finding it increasingly difficult to sustain their performance of the past three years.
The assets under their management (AUM) have increased multifold in these three years, but the stock of quality investable equity shares has not grown at a matching pace. Some of them have been reluctantly deploying the incremental flows in the limited number of available stocks, resulting in unsustainable rise in prices; whereas the others have chosen to go down the quality ladder and invested in the poor quality or apparently absurdly valued stocks.
Obviously, they lack conviction in their portfolios, but continue to hold it and even grow it due to professional compulsions. Arguably, they are riding the proverbial tiger with no end in sight for the ride. No surprises that they are stressed and desperate at the same time.
Individual investors on the other hand appear bothered by concerns, which have mostly emanated from psychological factors, perceptions and overflow of news flow and analysis. For example-
· The popular stocks which led the market rally in 2021-2023 (specialty chemicals, railway, defense, PSU banks etc.) have been underperforming in recent months. The investors who have material positions in these stocks are suffering from “other queue always moves faster” syndrome. Their anxiety is further elevated by the fact that the sectors like IT Services which were most undrowned in 2023 have recently done exceedingly well.
· Most investors have apparently internalized the exceptional returns they have earned in the post Covid period into their normal portfolio return projections. The analysts are now forecasting the market returns to revert to mean over the next couple of years, as the operating leverages fade and corporate debt begins to rise again, economic growth plateaus, and earnings growth trajectory descends to mid to low teens. Many investors are not finding the idea of 10-12% return on their equity portfolios exciting enough.
· The news flow and analysis are becoming increasingly confusing for them. In the evening, they hear that the imminent rate cut by the US Fed is likely to drive the global markets higher. However, in the morning they are presented with analysis of how the past episodes of Fed rate cuts have triggered sharp corrections in equity markets.
A host of analysts advise them to invest in gold; then some expert comes and tells them silver will do much better in the coming years as the demand for EV batteries and semiconductors rise. Credit analysts claim that bond returns shall outperform equities in a falling growth & rate scenario. There is no dearth of analysis on how cryptocurrencies are going to annihilate gold.
· There is persistent fear mongering of WWIII led by Russia and China. Astrologers are predicting retrograde Saturn, Jupiter and Mercury in the winter of 2024 could cause a massive crash in markets.
While all this is agitating the investors’ mind, an IPO lists at 135% premium to its issue price, luring them to allocate even more money to equities!!
