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Froth in new offerings, poor-quality companies, says Vinay Paharia of Union MF

Froth in new offerings, poor-quality companies, says Vinay Paharia of Union MF

Need to wait and watch how new amateur investors react to losses as equity markets fluctuate, says the fund manager

Amateur investors in share market Amateur investors in share market

The benchmark indices are trading near record levels but there is significant "froth" in various sections of the market especially in companies that lack fundamentals and also in some of the new offerings entering the stock market, said Vinay Paharia, Chief Investment Officer - Equities, Union Asset Management Company.

The fund manager further added this could be risky for investors and more so as the recent past has seen a lot of first-time or "amateur" investors coming to the markets who have not experienced losses.

"In some of the sections in the market, we are seeing froth in poor quality companies, we are seeing froth in some of the new offerings, and we are seeing significantly higher participation by amateur investors," says Paharia.

"That is a risk as many such investors have not experienced losses so we don't know how they would react when subjected to losses. As we are all aware, the equity markets fluctuate so it is yet to be seen how the market responds or how these amateur investors respond when subject to volatility - that I would say is a risk to some section of the market," he added on the sidelines of a virtual conference on quantitative investment approach.

This assumes significance as data from the National Stock Exchange (NSE) shows that there has been a huge upswing in the number of new investors coming to the markets this year. More than a million new client accounts got registered in each of the months in 2021 with June seeing nearly 1.5 million new client additions.  

This was nearly thrice the additions registered last year in June when 5.64 lakh new accounts were registered (10 lakh is 1 million).

Further, the benchmark S&P BSE Sensex has gained around 5,000 points or 11% in the current calendar year while touching a lifetime high of 53,291 on July 16.  

In terms of new issues, the current calendar year has already seen listing of 25 new companies, including the most recent Zomato, which saw a lot of hype surrounding it. The issue got subscribed more than 38 times and saw the share price gain over 80% on the debut day.

Shares of Zomato are currently trading at Rs 137, much higher than its issue price of Rs 76. Data from Prime Database, a primary market tracker, shows that as many as 20 more companies are lined up to launch their initial public offer with the cumulative value pegged at nearly Rs 29,000 crore.

Meanwhile, the fund manager of Union AMC, which is a joint venture between Union Bank of India and Dai-ichi Life of Japan, believes that equities will continue to enjoy the current level of valuations till interest rates globally remain at a low level.

"The central banks world over have been adjusting the monetary policy such that interest rates have been pledged to be kept at a lower level for a long period of time. So, till the time you see a significantly higher level of interest rates, the valuation that equities are enjoying will not undergo a material change. Till the time interest rates stay at where they are valuations are sustainable," says Paharia while adding that equities are long duration assets and are expected to offer a reasonably attractive return compared to other asset classes, over the next 5, 10, 15 years.