Excesses of the bull market

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The bull and chart for business or bull market trader concept

We are in a bull market. Nifty has tripled from the March 2020 Covid low of 7,511 giving excellent returns to investors. Many stocks have turned multi-baggers. The spectacular returns from the market have attracted millions of newbies into the market. The total number of demat accounts have exploded from 4.09 crores in April 2020 to above 13 crores now. Many IPOs, even those with high valuations, are getting oversubscribed many times. It is natural that in a scenario like this many excesses happen. The market, which often swings between greed and fear, is getting close to greed in some pockets. Investors should guard against some of the excesses in the market, which might harm them in the not-too-distant future.

SEBI chief Madhabi Puri Buch recently warned investors about some of the excesses in the market. She had asked the mutual fund industry to do stress tests on some of their schemes and take appropriate action where stress tests raise red flags. Sane voices in the market have been voicing concern over the frothy valuations in the mid and smallcap segments. Some mutual funds have already raised red flags about the valuations in the smallcap segment by either stopping further investments (SBI smallcap fund) or by refusing to accept lumpsum investments into their smallcap schemes (Tata small cap fund and Nippon small cap fund). These are sufficient red flags to investors. But investors, particularly the newbies driven by the FOMO factor, continue to rush-in to these segments. In the calendar year 2023 the mid and smallcap schemes received investments of Rs 64,000 crores out of the total inflows of Rs 1.6 trillion. It is significant to note that while smallcap schemes attracted inflows of Rs 41,035 crores in 2023, largecap funds saw outflows of Rs 2,968 crores. Recency bias – excessive influence of recent performance – is at play here. In calendar year 2023, while Nifty gave 20 percent returns, Nifty Midcap 100 and Nifty Smallcap 100  gave whopping 46 percent and 55 percent returns respectively. Newbies believe this outperformance will continue. This is unlikely to happen since valuations are excessive and vulnerable to sharp corrections caused by some negative trigger.

The SEBI chief has warned against some excesses in the IPO market, too. She said, “we have seen that there are hundreds of crores of applications with multiple PAN card details, knowing well that these applications will get rejected. The whole process is done to inflate the subscription.” She added, “68 percent of HNIs and 43 percent of retail investors flip their trades in the first week of IPO listing.” This trend of the IPO market becoming a “market of traders, instead of investors”  is a risky trend. A lesson from history is that frenzy in the IPO market often end in pain.

Investors should heed these warnings from the regulator and sane voices from the industry. It makes sense to remain invested in this bull market. The market has a long way to go. As India races to an $8 trillion economy with a possible market cap of around $10 trillion by around 2032, lots of wealth will be created through the stock market. But the journey will not be smooth; there will be sharp corrections in this journey, during which, many newbies chasing smallcaps and midcaps with lofty valuations will get hurt. The warnings from the regulator are timely.

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