It is interesting that the recent rally in the stock markets which took the Sensex and Nifty50 to lifetime highs this week, was powered by exuberant Foreign Portfolio Investors (FPIs) and not bullish domestic investors. Indeed, there have been many indications lately that the domestic retail investors’ passion for equities developed during the Covid period, has been cooling.

The pace of new demat account openings has moderated from over 3 million a month in FY22 to below 2 million lately. Retail flows into equity funds were flat in FY23. After the disastrous show by new-age firms, the retail frenzy for IPOs has waned, with collections halving in FY23. Domestic investors are quite right to be wary of equities today, as valuations are not cheap and earnings prospects are moderating. Nifty50 earnings after jumping 19 per cent in FY21 and 40 per cent in FY22, have grown only 11 per cent in FY23. This makes the current price-earnings multiple for the Nifty50 at 23 times trailing earnings and 20 times forward earnings, quite pricey.

Despite these factors though, FPIs, after pulling out over $4 billion from Indian stocks in the first two months of 2023, have returned to pour $11.1 billion into them in the last four months. One explanation for this seems to be the TINA (There Is No Alternative) factor. With Europe and US teetering on the brink of recession and China expected to grow at just 5.2 per cent in 2023, India’s forecast GDP growth of 6-6.5 per cent for FY24 may seem quite appealing. India has also demonstrated exceptionally sound macro-economic, fiscal and monetary management post-Covid, managing to swiftly normalise the fiscal, monetary and liquidity stimuli rolled out during the pandemic. The Reserve Bank of India also seems to have headed off inflation through measured rate hikes, without hobbling growth. India’s current account balance has been in unusually good order too, despite the global turmoil. Exchange rate stability has made India an attractive destination among emerging markets for FPIs after it became apparent that the US Fed was set to pause its rate hikes.  

One hopes that, having turned wary at the right time, retail investors don’t get tempted by this breathless rally to pile on to equities at the wrong time. In the past couple of years, market regulator SEBI has done a great deal to rein in speculative excesses in the cash market by sharply raising margin requirements, curbing the leverage available to traders and sweeping volatile stocks under the punitive exchange surveillance mechanism. But while all this has turned the cash markets a hostile playground for speculators, the derivatives market has been drawing in hordes of newbies. There’s a booming business in YouTube, Telegram and WhatsApp channels offering paid webinars and tips on options trading. SEBI and the exchanges must do what they can to warn off retail investors from this minefield. And if investors don’t pay heed, a new set will end up learning some very old lessons on equity risks.    

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