The word Atmanirbhar has recently been used a lot to express a general desire for economic self-sufficiency in a whole range of fields, often in erroneous or delusional tones. These chauvinist dreams aside, the only area where it can indeed be applied for the past year, without gross exaggeration, is the Indian stock market. This is worth mentioning as it is perhaps one of the few cases where the Indian market has not capitulated to the relentless selling off by foreign investors. While it would be an overstatement to suggest that foreign institutional investors or FIIs have always been instrumental in shaping market trends, in the absence of a strong counterweight from the domestic investor fraternity, major bouts of selling or buying from FIIs would in fact determine significant market fluctuations over short periods of time. This has given rise to the phenomenon of waiting, impatiently, for “FII numbers” at the end of each trading day. But that was then.
FII matters, and always will, but not so much. In 2022, so far, they’ve sold over $22 billion worth of Indian stocks, but the Nifty is down less than 10%. In previous years, the index would likely have crashed 25% after such an onslaught, but not this time. Indeed, domestic investors injected $23 billion during this period, absorbing the foreign supply entirely. It is nothing less than remarkable. Not only has this brought stability to the market, but it has also erased India’s usual underperformance relative to other emerging markets, during FII pullback phases.
It has also led to some bizarre shifts in the internal dynamics of large-cap stocks. Blue-chip stocks used to top when the FII holding limit stipulated in their meters ran out, as investors feared it would rob them of their strongest technical trigger. Now, the opposite is true, as investors shun stocks held largely by these same FIIs, as these brand names bear the brunt of relentless selling. The world’s hallowed HDFCs and Infosys, perennial darlings of global investors, are now among the biggest underperformers. How times change.
Taking center stage now are local investors who, after decades, seem to have finally warmed to the idea of investing in stocks. Early days still, but the signs over the past two to three years have been very encouraging; enough even to hope it wasn’t a flash in the pan. Flows to domestic mutual funds and portfolio management services or PMS programs have always been robust, new demat account openings have been up and down, and even the sharp Covid-19 levy has not did not seem to shake new investors. More encouragingly, Systematic Investment Plans or SIPs have continued to grow at a healthy pace, indicating that equity investing may become a habit or part of asset allocation, rather than a occasional flutter. So far, so good. But here is the test.
For the first time in two years, the color of the market is changing. It no longer seems to be the “buy on every dip” trend that newbie investors have grown accustomed to. A fundamental reset is underway, and although local investors have shown nerves of steel so far, tougher days lie ahead. Because if the sale of Covid-19 was brutal, it was very short-lived. A true bear market, the likes of which newcomers to the market have yet to see, is a test not only of courage but also of patience. Not only a brutal crash of 20%, then back to the races. Once portfolio drawdowns drag on for months or even quarters, belief begins to be shaken. It’s worse if competing asset classes shine in comparison.
This last point is important, as it was the lack of lucrative investment options that initially sparked local investors’ interest in stocks. Low interest rates, low gold yields and a lackluster real estate market have been a big part of driving yield-seeking investors to turn to the stock market. After all, these three asset classes still account for 80% of all Indian household assets, with equity accounting for only around 5%. Now, as fixed deposit rates start to climb again, the housing market recovers from a decade-long slump, and gold feeds on global risk aversion to edge higher, that 80% could- they become relatively safer again? Old habits die hard, after all.
This is the risk that the Indian stock market faces. Overall risk aversion could remain elevated for the rest of the year. Against this backdrop, what if some of the $38 billion that has been invested in domestic mutual funds since March of last year is withdrawn? This may be a double whammy too much for the market to bear. Why, even a pause in domestic entries may be enough for the FII to sell to inflict deeper reductions on stock prices.
So this is the test of the bear market for Indian retail investors, who may have thought they would escape it. Nobody can. This growth and decline is the very nature of the market, even if the reasons change each time. In India, we are inclined to paint everything as ‘structural’, until they become ‘cyclical’.
It will be interesting to watch how retail investors navigate this challenge, as it could be a key inflection point in Indian investment behavior that finally paves the way for a sustainable transition to financial assets. , as in more developed economies. It is therefore vital that, as painful as this ongoing bear market is, the retail trade takes it head on. Learn from it, be tempered and humbled, but not scarred enough to abandon the asset class, as past generations may have done after the Great Financial Crisis or the Harshad Mehta scam. It would be a colossal mistake. These are the days that make boys into men. Because nothing can be unique or whole that has not been torn, as the poet said.