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Home >Opinion >Views >The stock market is on an overdrive; the govt should cash in

Zomato’s initial public offering (IPO) exemplifies everything about the stock market and its idiosyncratic behaviour. When the economy fell last year and almost all sectors were devastated, the stock market stood firm. This continues even today, notwithstanding the second wave of covid infections, or possibly a third wave that could hit the country anytime. The 50,000 BSE Sensex mark is taken for granted and the question is when it will reach 60,000. The media is full of various expert opinions with disproportionate time devoted to explaining market movements. Unlike economic views, where there is almost always some discord, when it comes to stock markets, one rarely ever hears a voice that says that shares are overvalued.

The IPO of Zomato, an app-based food delivery business, has been oversubscribed 38 times and shares with 1 as face value sold at a premium of 75. On listing, several millionaires were born. Evidently, the market loved the offering. But if one looks at the financials, the last three years have seen negative earnings before interest, depreciation, tax and amortization (‘ebidta’), which begs the question of where investors are spotting value. It may be unfair to pick up Zomato, but this holds true for several companies whose offerings have been picked up with alacrity and little regard for logical macro-economic factors.

The standard response given is that stock prices don’t look at the past or present, but at the future. Valuations are based on how a company is expected to perform. If one believes the growth story of India, then the economy should gallop ahead at a pace of 8% per annum soon, led by India Inc, and investors could join the party. In this view, losses today will be profits tomorrow, which will make a stock pick’s earnings per share attractive and reflect in its price. In such a sanguine scenario, stocks are the way to go.

Let us see how the BSE Sensex has moved over the past decade. Starting January 2010, it hovered within the 15,000-20,000 band for 45 months, which is almost four years. Subsequently, between October 2013 and April 2017, a span of 43months, this stock index moved up and down between 20,000 and 30,000. Once again, it took around three-and-a-half-years for a new peak to be reached. For the next 29 months, till September 2019, the Sensex was between 30,000 and 40,000, indicating a shorter time taken to climb by 10,000 points. For the next four months, it remained above 40,000 until covid struck and pushed the market down. But that shock was short-lived, as post-June, trends began to shift. Between June and October 2020, the Sensex stayed in a range of 30,000 to 40,000. Then, over the next six months, it raced to the 50,000 mark. Since May this year, when our second major round of covid lockdowns began, it has been party time as the Sensex has stayed above 50,000 all through.

Clearly, the amplitude of the index movements has come down and new peaks are being achieved with greater frequency. This is a boom phase, evidently, and retail investors are looking to invest in a market at 50,000-plus levels. One should remember that anyone entering the market today will have to see the index move towards 60,000 and then 70,000 to reap its benefits. Those who came in earlier, even in 2019, would have witnessed a substantial gain of over 30%. But, will this be sustained or will the ascent snap? Based purely on trend analysis, one can say that it should not fall as low as 30,000; note the swift recover after the first lockdown in 2020. But whether one needs to wait four years or just six months for gains cannot be conjectured today.

But why is the common man running after stocks? There are four big market drivers. The first is the ‘greed effect’. “Greed is good," said the fictional character Gordon Gekko in the movie Wall Street. So investors are looking for a potential upside of 20-50% based on stock movement trends. After all, if it happened in the past, it can happen even tomorrow.

The second is the ‘bandwagon effect’. If others are doing it, so should I. This is common today, especially when there is a buzz around an IPO and everyone laps it up believing that once it enlists for trading, its price would go up, delivering instant gains. Hence, the Veblen Effect takes hold.

Third is the ‘expert effect’. One gets glued to business TV channels or reads business papers, most of which feature stock experts who are perpetually bullish about various companies and sectors. There exist retail-focused question-and-answer sections, too, where advisors always tell one to invest. Rarely does anyone suggest sticking to, say, fixed deposits. Of course, the language often has terms like ‘risk appetite’ while offering vague advice. Investors, for example, are told to ‘hold’ a stock for a ‘long period’ that is seldom defined. The emphasis is clearly on encouraging people to buy equities.

Fourth is the ‘pushed-to-a-corner effect’, where even conservative households that see negative returns elsewhere feel constrained to invest in stocks. Inflation above 6%, for instance, means negative returns on fixed deposits. And then changes in small savings rates announced by the government every quarter cause their own trepidation. What experts say begins to sound useful.

To conclude, the stock market seems crazy. But then, it also means this is a good time for the government to go ahead with its disinvestment plans to garner resources.

Madan Sabnavis is chief economist, Care Ratings, and author of ‘Hits & Misses: The Indian Banking Story’. These are the author’s personal views

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