Vijay Kumar Gaba

 The Indian equities performed decently in 2021. Investors would normally have nothing to complain about the returns on their equity portfolios.

·         The benchmark Nifty is up ~21% YTD2021. It is 6^th consecutive year of positive return on Nifty. Nifty has now returned positive return in 9 out of past 10years (2012-2021).

·         Nifty has averaged 15881 (based on daily closings) in 2021, which is 44% higher than the same average for 2020. Based on change in average, this is best performance since 47% gain in 2006; implying strong returns for SIP investors.

·         For long term buy and hold investors, five year rolling CAGR in 2021 is ~15.7%, which is best performance since 2013. Five year absolute Nifty return in 2021 is ~107%, also highest since 2013.

·         The market returns were fairly broad based in 2021. Smallcap (~56% YTD2021) and Midcap (~44% YTD2021) have done significantly better than Nifty (~21% YTD2021). Broader market indices are now outperforming the benchmark Nifty on 3yr and 5yr basis. The household (retail) investors investing in diversified portfolio have also therefore recouped the underperformance of 2018-19.

·         Nifty has outperformed most of its emerging marker peers in 2021; and has performed in line with the top performing major global markets US and France.

…but some concerns emerging

In recent weeks however the market has given some cause for concern that have clouded outlook for the year 2022. Having quickly recovered all the losses from panic reaction to the pandemic, and moving about ~50% higher than the pre pandemic Nifty highs of ~12500, the Indian equity markets now appear tired and indecisive.

·         After topping ~18600 in October 2021, Nifty is not back to ~17000 level, where it was in August 2021. However, during this 3200 odd point up and down journey of Nifty, the actual outcome might be very different for various investors, depending upon their portfolio positioning and activity during this period. Considering that the daily volumes were highest around the peak level of October 2021, it is likely that some investors got greedy at the peak and invested larger amount in mid and small companies. They may have lost 10-25% of his latest installment of investments.

·         In 4Q2021, Nifty has averaged over 17800, against the current level of ~17000. A large proportion of stocks are trading below their technical key levels, e.g., 200DMA, indicating underlying weakness in markets.

·         The market breadth has been consistently negative since August 2021.

·         Indian markets have outperformed most of the global peers in past 20months. The global investors are now looking at the underperforming markets in search of better returns. Many global brokerages like Credit Suisse, Morgan Stanley, CLS, Goldman Sachs etc., have downgraded the weight of Indian equities in their portfolios to allocate more to China etc. The global flows to India may therefore slow down further. Foreign investors have been net sellers in secondary markets for past many weeks.

·         RBI has started to normalize the excess liquidity through variable rate reverse repo auctions of 14-day and 28-day. Currently, INR6tn/INR8.6tn excess liquidity is being absorbed through VRRR auctions. Going ahead, the RBI plans to increase the amount and tenor of absorptions through VRRR. This could impact the cost of borrowing for market participants and therefore impact the market sentiments.

·         Despite recent market correction, greed continues to dominate fear and household flows remain strong. The probability of a sharper correction in broader markets therefore remains decent.

 Presently, a large part of the market analysis and commentary is focused on the stock rally from the low prices recorded in March 2020. The popular narrative is that investors have made extraordinary return on their equity portfolios, in what was a once in a decade opportunity.

In my view, this narrative suffers from a serious lacuna. This narrative assumes that—

(a)   Investment is a discreet process and not a continuous one. Investors make investments only on occurrence of some event and exit as soon as the impact of that event dissipates.

(b)   The economic behavior of a majority of investors is rational. They are able to control the emotions of greed and fear very well.

(c)    Most of the investors have infinite pool of investible surplus, and they are able to invest material amount of money at their will.

Unfortunately, none of these is even half true.

Investment is a continuous process. Most of the investors stay fully invested in markets at most of the times. Usually, they reduce their exposure to risk assets like equity when down trend is fully established. So in March 2020, investors were raising cash not investing fresh money.

The economic behavior of a majority of investors is not rational. They are materially influenced by the forces of greed and fear. In summer of 2020, fear was the overwhelming sentiment. Expecting investors to increase risk in their portfolio at that time is akin to expecting a patient lying in ICU to worry about the sale in neighborhood grocery store.

An overwhelming majority of investors have a finite pool of investible surplus. A large part of this surplus remains invested at most of the times. The crash in March-April 2020 resulted in erosion in the market value of these investments. For the investors who could stay invested in the fall, the erosion has been mitigated by the subsequent rise in prices. The investors whose risk tolerance was breached by the fall would have exited their positions and therefore there losses would have become permanent in nature. Very few investors would have made material incremental investments close to the market bottom last year. Only these investors have some reason to celebrate. For most others, it is business as usual.

Statistically, if we eliminate the fall in March and April of 2020 and subsequent V shaped recovery and assume a market in ad continuum, Nifty is up about 26% from the pre Covid high recorded in January 2020. The past two year (June 2019 to June 2021) have yielded a near normal return of ~13.5% CAGR.

Small cap (55%) and Midcap (52%) have given better return than Nifty (26%) since pre Covid high of January 2020. However, if we consider the return of mid and small cap for past two years, there is hardly much to distinguish.

Most notably, PSU Banks and Media sectors are yet to reach their pre Covid highs. Banks, Realty, FMCG and Services are all underperforming Nifty if we consider data from pre Covid (January 2020) period. Metals, IT and Pharma are the only sector that have outperformed Nifty meaningfully in Past 16 months. These sector put together account for less than 30% weight in nifty.

The point I am trying to raise is that the investors must cut the noise out and focus on their investment strategy, which must be in full consonance with their and aptitude and risk appetite. Listening to the popular narrative and getting overwhelmed with the feeling of missing out (FOMO) will only lead them to make mistake that may cost dearly.