Amid Stock market rush, retail investors must exercise caution
After roaring to a new all-time high last week, the equity market in the country has taken a breather.
High inflation and RBI’s stated vow to hack price pressures down by hiking interest rates have not diminished market performance. So are many other local triggers: a stumbling rupee, falling exports, GDP growth under pressure, rising current account deficit (CAD) and unemployment in the country.
It is difficult to disagree with the argument that the stock market is no longer an apt economic barometer for India. The increased inflows by foreign portfolio investors (FPIs) riding the ‘There is no alternative’ factor, as well as an unprecedented rush of overly eager, neophyte retail investors in pursuit of some quick gains, have meanwhile sent stocks to the stratosphere.
A recent report by Morgan Stanley has predicted an “absolute upside with relative downsides” for the domestic equity market, with the Sensex rallying 10% in a base case scenario in 2023 and scaling to 68,500 points by next December.
No wonder retail investors are flocking to the market hoping to cash in on the boom. According to the Association of Mutual Funds in India, over 14 million new SIP (systematic investment plan) accounts were registered from April to October.
At the last count, the mutual fund industry had about 60.5 million SIP accounts. SIPs are the preferred instruments for investors who regularly invest in MF schemes. According to the sales and marketing head of Mercedes-Benz India, SIPs are eating into even the luxury car market as their actual sales are far from India’s potential and wealth.
Of course, emerging markets, including India, are likely to benefit from the foreign fund flow. But one should not ignore the underlying challenges. For retail investors, it may be foolhardy to put all their eggs in one basket.
Morgan Stanley has pointed out some downside risks too. A deep and broad US recession leading to slowing earnings and a consequent rise in the dollar could put pressure on India’s balance of payments. Similarly, a resurgence in oil prices may push inflation and interest rates up, leading to corrections in equity returns.
Recent reports also suggest that the corporate profit-to-GDP ratio has declined sharply in the last two quarters, reversing the steep rise in the previous quarters. Every retail investor should exercise adequate caution before placing a bet on the equity market