Beware! Canny market tends to draw investors in and trap them

Shops, malls, hotels, restaurants and cinema halls have largely remained empty as they reopened in much of India. But the domestic equity market is a crowded place.

Data showed nearly 18 lakh new accounts were opened with the Central Depository Services (India) in March, April and May against a combined 8.41 lakh opened during January-February.

Chances are high that some of these new entrants are among the happiest lot on Dalal Street, as the benchmark BSE Sensex has advanced around 35 per cent from the 52-week low hit on March 24. Data showed over 85 per cent stocks have managed to deliver positive returns to investors for this period.

But analysts are growing increasingly suspicious about the rally. They say it is difficult to lose sight of the hard macro realities and they do not justify such a rally.

“This is just a liquidity-driven rally. FIIs are continuously covering their shorts since March-end. They are long because of excess liquidity. The moment something goes wrong in global markets, you see the apprehension,” Milan Sharma, Partner, 35 North Ventures said, adding the domestic equity indices can easily correct 20-30 per cent as ground reality is very challenging.

He advised investors to book profit at these levels.

Foreign portfolio investors pumped in a massive Rs 20,824 crore into domestic stocks in the first week of June. Prior to this, they bought shares worth Rs 14,569 in May after selling shares worth Rs 61,973 crore in March and Rs 6884 crore in April, NSDL data showed.

Nifty has rallied from the low of 7,511 to 10,328, delivering a solid 37 per cent returns within a very short span of time.

In the Sensex pack, stocks like M&M, Reliance Industries (RIL), Sun Pharma, Bharti Airtel, Hero MotoCorp, Bajaj Auto and ONGC have risen 30-85 per cent from their March lows.

About 54 midcaps and smallcaps have doubled prices in this period. They included Opto Circuits, Vikas Eco Tech, Prozone Intu Properties, Sanwaria Consumer, Sintex Plastics, Marksans Pharma and Jain Irrigation, among others.

Market veterans say new investors who have tasted these returns in their very debut are at high risk of burning their fingers.

“The problem is these people do not understand the risk,” says AK Prabhakar, Head of Research, IDBI Capital Market. “The market often plays a canny trick to bring people inside. Any sudden correction will force investors to bring in more money on the table to average losses and that time they will get stuck for 1-2 years.”

Prabhakar said this is time to be careful. “We are in a bad phase of the market. Things are not improving at the ground level. I see Nifty at 6,200-6300 levels in next selloff,” he said.

Ajay Bodke, CEO & Chief Portfolio Manager (PMS) at Prabhudas Lilladher, says one should keep a hawkish eye on the US Dollar Index to figure out how long will this continue.

“The clearest single indicator of global risk appetite is the US Dollar Index. A sharp fall from 103 level during the peak of Covid-19-related fears in end-March 2020 to 96.5 now is signalling a massive risk-on trade with money pouring out of safe haven US government bonds into risky assets like equities, including emerging market stocks,” he said.

This, he said, is underpinned by trillions of dollars of liquidity support provided by global central banks and fiscal stimulus by various governments.

Taher Badshah of Invesco Mutual Fund, however, says the markets are past their point of peak fear. “There is a very low probability of equity markets globally as well as in India re-testing the lows seen during March 2020 as there is now clear evidence of control over the pandemic across many parts of the world due to lockdown and social distancing initiatives over the last 3-5 months. Plus, strong fiscal and monetary stabilisation measures have been initiated by various governments across the world. Varied efforts at treatment and cure of the virus at multiple medical institutions around the world are in progress. Economies globally are attempting to emerge from a lockdown. It would take significantly bad news for markets to revisit recent panic bottoms,” he said.