The word Atmanirbhar has recently been thrown around quite a lot, in expressing a general yearning for economic self-sufficiency in a whole gamut of spheres, often in misguided or delusional tones. Such jingoistic dreams aside, the one area where it can indeed be applied for the year gone by, without gross exaggeration, is the Indian stock market. This bears mention as it is perhaps one of the very few instances where the Indian market has not capitulated in the face of relentless selling from foreign investors. While it would be a stretch to suggest that foreign institutional investors or FIIs were always solely instrumental in shaping market trends, in the absence of a solid counter-balance from the domestic investor fraternity, major bouts of selling or buying from FIIs would indeed determine significant market swings over short periods of time. This gave rise to the phenomenon of waiting, with bated breath, for the ‘FII numbers’ at the end of each trading day. But that was then.
FIIs matter, and always will, but not that much any more. In 2022, till date, they have sold over $22 billion of Indian shares, but the Nifty is down less than 10 per cent. In previous years, the index would probably have collapsed 25 per cent after such an onslaught, but not this time. This is because domestic investors have pumped in $23 billion during this period, fully soaking up the supply from foreigners. This is nothing short of remarkable. Not only has this lent stability to the market, it has also erased India’s usual underperformance relative to other emerging markets, during phases of FII withdrawal.
It has also led to some quirky shifts in the internal dynamics of large-cap stocks. Earlier, blue-chip shares would plateau when the stipulated FII holding limit in their counters was exhausted as investors feared it robbed them of their most potent technical trigger. Now, the opposite is true, as investors shun stocks heavily owned by these same FIIs, as these marquee names bear the brunt of relentless selling. The hallowed HDFCs and Infosys-es of the world, perennial darlings of global investors, are now among the biggest under-performers. How times change.
Taking centre stage now are local investors who, after decades, seem finally to have warmed up to the idea of equity investing. Early days yet, but the signs, over the past two to three years, have been very encouraging; enough even to hope that this may not be a flash in the pan. Flows into domestic mutual funds and portfolio management services or PMS schemes have been consistently robust, new demat account openings have sustained through ups and downs, and even the brutal Covid-19 drawdown didn’t seem to shake new investors off. Most hearteningly, systematic investment plans or SIPs have continued to grow at a steady pace, indicating that equity investing may be becoming a habit, or an integral part of asset allocation, rather than the occasional flutter. So far, so good. But here comes the test.
For the first time in two years, the colour of the market is changing. It no longer appears to be the ‘buy every dip’ trend newbie investors have gotten used to. A fundamental reset is under way, and while local investors have shown nerves of steel so far, more challenging days lie ahead. For while the Covid-19 sell-off was brutal, it was very short-lived. A real bear market, the likes of which the new-to-the-market have not seen yet, is a test not just of courage but also patience. Not only a sharp 20 per cent crash and then off to the races again. Once portfolio drawdowns linger into months, even quarters, conviction begins to get shaken. It feels worse if competing asset classes shine in comparison.
This last point is important, as it is the absence of lucrative investment options that got local investors interested in equity to begin with. Low interest rates, poor returns from gold and a lacklustre real estate market had played no small part in driving return-seeking investors to the stock market. After all, these three asset classes still account for 80 per cent of all Indian household assets, with equity just about nudging 5 per cent. Now, as fixed deposit rates begin to climb again, the real estate market recovers from a decade-long slump and gold feeds on global risk aversion to edge higher, could this 80 per cent begin to look relatively safer again? Old habits die hard, after all.
This is the risk that the Indian stock market faces. Global risk aversion may remain elevated through the rest of this year. Against such a backdrop, what if some part of the $38 billion that has been invested through domestic mutual funds since March last year, is withdrawn? It may be a double whammy too difficult for the market to bear. Why, even a pause in domestic inflows may be enough for the FII selling to inflict deeper cuts on stock prices.
This, then, is the bear market test for Indian retail investors, who may have thought that they would escape it. No one can. This waxing and waning is the very nature of the market, though the reasons keep changing each time. In India, we are prone to painting everything as ‘structural’, till they turn ‘cyclical’.
It will be engaging to observe how retail investors handle this challenge, for it could be a key inflection point in Indian investment behaviour—one which finally paves the way for a durable transition to financial assets, like in more developed economies. It is vital therefore that, however painful this ongoing bear market turns out to be, that retail takes it in its stride. Learn from it, be tempered and humbled by it, just not scarred enough to abandon the asset class, as past generations may have done after the Great Financial Crisis or the Harshad Mehta scam. That would be a colossal mistake. These are the days that make men of boys. For nothing can be sole or whole, that has not been rent, as the poet said.
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