Beware of greed

Indian stock markets snapped a two-week winning streak on October 22. In fact, after hitting new milestones on the benchmarks Nifty and Sensex of 18,604 and 62,245 respectively, one is seeing the first signs of a crack in the market. Most market analysts have been talking about a long overdue correction as this bull run has been uninterrupted since the last 18 months in India. This rally has surprised all market watchers as there has not even been a 5% correction since March 2020 and every small dip has been bought into. So, will the current volatility be arrested and be followed by another surge to new all-time highs, or, will this turn fears of a deep correction into reality?

Many emerging markets this year have corrected 8%-25% from the top while India has seen an over 20% rise. Even if we look at the valuation gap, many of these markets are trading at single digit valuations whereas Indian markets are trading at 25 times earnings.

Almost all brokerage houses are insisting that market valuations are out of sync. Trades are taking places way above historical averages and every time when such valuations have happened in the past, markets have come tumbling down. Experts say, the biggest risk to this market which has been in continuous euphoria is greed. About 14 million new demat accounts opening in the past year and a half suggests the influx of first time retail investors like never before.

This encouraging participation of retail investors has been well cherished. However, majority of first-time investors don’t recognise the risks, and even if they do, it gets difficult for them to know how to manage risks. If the markets were to cool off by 10%-20% now, how many of these new entrants, will stay put will be the litmus test. But any correction will again pave the way for new entrants, who are waiting for a descent from the historical highs to start investing, to step into the ring.