Indian stock markets have been rather resilient in the midst of all the gloom surrounding the CoVid-19 pandemic. Even the rising number of cases in India and across the world is not denting investor appetite for stocks.
In fact, the Indian market is one of those that have kept pace with foreign markets, particularly the US. Ever since its rise from March 23, the Indian market has gained 39% even as the Dow Jones gained 41%.
Lately some of the good cheer in the markets has rubbed off on even the small- and the mid-cap spaces.
While many of these companies’ financials will be sorely hit in the next one or two quarters, the market seems to be ignoring the near-term issues.
The returns in small- and mid-cap stocks are noteworthy, having surpassed returns of the frontline indices. In fact, the Nifty Midcap 100 gained 36% and Nifty Small Cap 100 gained 39%, which is almost as good as the frontline. Remember, these stocks have been laggards since January 2018.
One of the reasons for the recent pickup in the markets is sustained buying by mutual funds and domestic investors. Domestic flows could continue to be robust as investor sentiment is fairly high.
Now with small- and mid-cap stocks rising, more domestic investors are likely to be jumping onto the market band-wagon.
The question now is whether the resilience will continue?
The market momentum could continue for a few reasons. First, the number of investors has risen in the past few months with several thousands of new accounts opened recently. New investors bring with them new money.
Of course, this also leads to swelling choppiness and wild swings in individual stocks. But the fact is that wider participation increases demand for stocks – and pushes up their prices.
Second, investors are willing to forgo earnings in FY21 because of the pandemic. The global pandemic has undoubtedly hit many companies hard, and some are likely to record huge losses in the first quarter.
Some businesses have not yet resumed operations even after unlock 2.0 has been initiated. Others with larger fixed costs have to borrow to tide over the cash-crunch like situation.
But investors are willing to overlook this if earnings growth is likely to rebound in FY22. That seems to be the case right now.
Third, and most important, is rapid progress is being made regarding vaccines.
Several vaccine candidates have crossed the phase 2 stage and are entering phase III trials. If a suitable one is found quickly, business normalcy will return rapidly.
Last, investors are more willing to take risks because opportunities in the rest of the economy have shrunk. Many fresh entrants are looking at beefing up investments, and hence are turning to the stock markets and mutual funds.
Returns from other asset classes such as fixed income have shrunk in the recent past. Hence, some investors are making a switch to riskier assets such as equity.
For them the switch couldn’t have come at a better time. The rise in the markets shows that all is not lost. Sure, while global liquidity has been ample, foreign flows into the Indian market have been lower.
It’s largely domestic money that has found a voice – and a good one at that.
But while all this is good, one must ensure that one has taken a sensible and cautionary step while testing the waters of investing in equity. One has to differentiate between trading and investing.
If you are in for the short haul, and trading beckons, ensure you limit your investment capacity to about 5-10% of your total capital.
The market is at the stage now where many stocks have already thrown up fabulous returns. Don’t now ruin your chances – and spoil the party.
