Vijay Kumar Gaba

There are two types of investors in Indian stocks markets – (i) who own all Tata group stocks and all internet and related businesses like IRCTC, IEX, IndiaMart, InfoEdge etc.; and (ii) the others who own none of these. (It’s a Joke or Irony only time could tell.)

A survey of Indian investors indicates that presently the investor positioning and opinions are deeply and widely divided. The survey in the form of a free unstructured discussion with some professional, household and institutional investors was conducted over past two weeks.

Indian investors – A divided house

Based on the discussions, the investors in Indian equities could be divided into the following ten broad categories –

(i)    Fearful - Investors who are fully invested and are overweight in equities and/or cryptocurrencies but are uncomfortable with the current price levels and volatility. This category mostly involves High Networth households who have significantly increased their active involvement in the financial markets over past couple of years. Most of these investors have earned good return on their capital. They are moderately leveraged. Most of them have yet not defined any strategy to moderate their exposure to risk assets, though they are afraid of severe market correction and erosion in the value of their portfolios. Some of them are exploring investment in real estate by taking some money out from financial investments. They have been consistently reducing exposure to debt instruments and increasing allocation to equities and other risk assets.

(ii)   Fearless - Investors who are exclusively trading in risk assets like equities and cryptocurrencies, and are not bothered at all about the current price levels or volatility. These are mostly household investors (not necessarily high Networth) who have taken to trading in financial markets as their full time occupation in recent past. They enjoy the high volatility and are least bothered about the things like valuations, business models, sustainability etc. They have moderate to high leverage; and mostly have negligible allocation to debt securities.

(iii)  Optimistic - Investors who are deeply convinced about the “India Story”. They believe that the valuation premium for Indian equities is justified given the high growth potential, changing global supply chain landscape, increasing level of organized businesses and larger role of Indian businesses in the new economy. These are mostly professional and institutional investors. Many of these have recently increased their allocation to equities given the pressure on bond yields. Only a few of these would advise leveraged positions in equities at present level.

(iv)   Cautiously optimistic - investors, who are convinced about the long-term ‘India Story”, but find the present price levels unsustainable in the short term. These investors are a mix of professional investors, institutional investors and high networth households. They have been reducing their equity allocation for past couple of months. Paradoxically, some of these have increased the allocation to high yielding (credit risk) debt.

(v)    Hopeful - Investors, who misjudged the markets in the past 20 odd months. They either reduced their equity allocation significantly after pandemic breakout; or during the market rise in the past 6-9 months. These are mostly professional and household investors. They are overweight on debt, gold and alternatives like arbitrage funds that have yielded very poor returns over the past 20 months. These investors are sincerely hoping for a major correction in the equity prices so that they can correct their mistake by increasing their equity allocations. Ironically, many of these investors have increased their allocation to foreign equities in past one year to compensate for lower allocation to the best performing Indian equities. Their arguments for investing in Asian (mostly Chinese) and US equities are varied and mostly unconvincing. For example, a veteran investor allocated 10% of his portfolio to US Tech stocks, while vehemently arguing against the valuation of Indian IT and internet sector. Similarly, a professional investors, who listed meltdown in China as one of the key risks for the market, is invested in a global fund focused on Asian Tech sector (mainly Chinese semi conductor and internet stocks).

(vi)   Happy - Investors, who stayed composed and disciplined during the market volatility and religiously adhered to pre-determined asset allocation. These are mostly professional investors and high networth households. Many of them have changed their strategic asset allocation to increase the weight of equities in past one year; while maintaining a conservative debt profile. These investors are closely observing the markets for any lucrative opportunity, but are not perturbed by the present volatility.

(vii)  Dismissive - Investors, who have materially cut their allocation to risk assets like equities in the past 20 odd months and are regretting their decision badly. They are mostly household investors. They are regularly convincing themselves that the entire rally from March 2020 lows is farcical and the prices will correct to those levels in next one year. Though, many of these are actively looking at real estate to make up for the opportunity loss of equities. Interestingly, some of these are actively trading in commodities.

(viii) Hypocrite – Investors who are cautious and fearful in their personal capacity, but are advising others to increase the weightage of risk assets in their portfolios. These are mostly professional and institutional investors. A couple of fund manager who sounded extremely cautious in their comments, were actually seen aggressively marketing their small cap funds a few hours later.

(ix)   Explorers – investors who are consistently looking for profit making opportunities in the market, regardless of the benchmark index numbers, pockets of over exuberance and popular trends. These are mostly professional and institutional investors, who are either running ahead of the market in identifying new trends and rotating their portfolios to position for the likely emerging trends; or discovering the pockets of under valuations and positioning their portfolios with the assumptions that these pockets will soon converge with the broader market trends.

(x)    Observers – these are mostly passive or inactive investors, who observe the markets from a distance and have little position of their own. They are financially unaffected by the market movements; however many of them are very aggressive and emotionally charged about their opinions about markets. They love to express their views and offer advice to fellow investors.

While you discover what category you fall in; it might be worthwhile to also figure out- do you truly belong where you are, or you just drifted to this category unintentionally/unconsciously.

…and how they view the market

The investors in different categories analyze the present market conditions and trends from their own vista points. Obviously, they have divergent views, opinions and outlook for the markets. The following are some of the market views that are interesting to note.

Perception versus realty

While it is fashionable to talk about the stocks from some business groups (e.g., Tata, Adani etc.), the top gainers since first lockdown (23 March 2020) and second wave (01 April 2021) amongst the NSE500 group show no clear pattern or trend.

The top 25 gainer since first lock down do have significant participation of Adani group stocks and midcap IT Services, but otherwise the stocks and sectors are diversified. An overwhelming majority of stocks are small cap and there is no large cap stock in top performers. These stocks belong to a variety of sectors like IT Services, Energy, Telecom, Textile, Specialty Chemicals, capital goods, and pharma etc.

Contrary to popular perception, specialty chemical, pharma, and metals have scant representation in this group. Internet and retail are totally absent from this group. There is only one Tata Group stock (Tata Elxsi) in top 25 list, and no metal stock, except Jindal Stainless.

The list of top 25 underperformers is also quite random and lacks any clear trend or pattern. Apparently, Banks and Microfinance Institution appear to be top under performers. But most names included in the list have company specific reasons for their underperformance and do not necessarily represent any trend.

If we look at the market trends since second wave, a similar randomness is observed. There is no clear pattern or trend visible from the top outperformers and underperformers during April-September 2021 period. No Tata, Adani, Internet, Retail, IT services, PSU dominance is visible. Auto, Consumers and Hospitality stocks are also absent from the lists.

If we observe the sector-wise trend over the two time frames April 2020 to September 2021 and April 2021 to September 2021, we do get some interesting trends. For example,

Trends and patterns since first lockdown till September 2021

(a)   More sectors have underperformed the Nifty50, then the number of sectors that have outperformed; implying that the rally since lows of March 2020 has actually been much narrower than it is perceived; even though the broader markets have outperformed the benchmark indices by wide margin.

(b)   The global trends (IT and Metals) have dominated the markets since first wave. Contrary to popular perceptions, Pharma has been an underperformer.

(c)    Financials have underperformed materially, despite significant improvement in the operating performance and asset quality.

(d)   Realty sector has outperformed though not significantly.

(e)    Small cap (123%) and Midcap (76%) have significantly outperformed the benchmark Nifty (32%).

(f)    FMCG (and hence MNCs) have been the worst performers in this period. It would need lot of explaining to rationalize the outperformance of commodities when the consumption demand and capacity utilizations are at poor level.

(a)   In post second wave period, more sectors have outperformed the benchmark Nifty than the number of sectors that underperformed. The gap between the performance of smallcap/midcap and benchmark Nifty also widened further.

(b)   The domestic sectors like Realty, Infra, PSUs, Media and power joined the list of outperformers alongwith the global sectors like IT Services and Metals.

(c)    Surprisingly, Automobile has been the worst performing sector in this phase, despite some superlative performance from auto major Tata Motors.

(d)   Financials continued to underperform, despite popular perception of PSU Banks doing very well.

(e)    Pharma and Consumers also remained notable underperformers.

(f)    Given the rise in inflation (building material), rise in bond yields and expectations of monetary tightening; the bullishness in Realty while the lenders continue to underperform and the household participation in equity market is rising sharply is also a subject for deeper analysis.

Given the total randomness of the market performance, it is difficult to draw any meaningful conclusion from the performance during April 2020 and September 2021.

So far there is little sign of any sector’s overwhelming dominance on the market. Nonetheless, there are some small pockets of over exuberance and unsustainable valuations, where the investors need to tread with extreme caution.

In particular, the themes like renewable energy, ecommerce and hyperinflation have driven prices of some stocks to levels which may be unsustainable even if we extrapolate current business trends to 20yr forward.

Indubitably, renewable energy is a paradigm shift in global economics and may be a great business opportunity; but the assumption that all renewable energy producers and their ancillary units will make enough money to justify current valuations appears mostly off the mark.

The assumptions that current commodity prices will sustain the slowing growth, tightening money, declining consumption and normalizing supply chains even for a year appear absurd.

It is therefore likely that we might see a major sectoral rotation in next 6months, while the present broad trend (broader markets outperforming the benchmark) continues.