How long will the greater fool theory work on Dalal Street?

• Follow

Markets touched yet another lifetime high this week. The past year has been a dream for investors as the benchmark and broader indices continued their momentum and this trend was not confined to India alone, it swept far and wide across the globe. The US and Chinese economies have been witnessing some amount of demand-led inflationary pressure. But India, on the contrary, is encountering heightened inflation above its 6% comfort mark largely on the back of soaring fuel prices instead of pent up demand. This point certainly needs attention given that crude prices are expected to continue rising higher due to the supply crunch.

It is said that rising inflation is synonymous with an improving economy and equities usually do well when inflation is at slightly higher levels but not too high. This bodes well with Fed as well as our RBI’s onerous stance on not hiking interest rates promptly.

This time around inflation and bond yields are seeing a bit of contradiction where the former is rising and the latter is witnessing a dip. Both, rising as well as falling bond yields bring with itself their own set of fears. Moreover, cautionary signs are emanating from all other places too in the form of a dip in GST collections below Rs. 1-trillion mark to mounting India’s debt to GDP ratio which now stands at a 14-year high.

While these macros keep rolling from positive to poor economic outlook, what remained constant in the past year is the fact that markets continued their journey without bothering about the macros. Investors, who were greedy when others were fearful or who stuck to the rally ignoring all the noise, vastly benefitted by clocking hefty returns. This teaches a powerful lesson on investing, which is to remain invested through the thick and thin of markets.

Event of the Week

IPOs continue to shine and when paired with a bull market, the interest is amplified as promoters and PE investors benefit from attractive valuations. Retail investors tend to misinterpret oversubscription numbers and get excited by the demand, overlooking the fact that only a small portion of the total issue size is allocated towards retail which means that the supply is already less. Promoters and PE investors stand to gain from the IPO as long as someone is willing to pay the price. This pattern holds true for both retail and institutional investors who chase IPOs for “listing gains” confident in finding a suitable buyer post listing at a premium. This vicious loop coined as the “Greater Fool Theory” suggests that people are able to sell at inflated values as long as there is someone willing to buy at an even higher price (the greater fool). This cycle continues as long as willing participants continue to pump money into stocks.

Technical Outlook

Nifty 50 index closed positive for the week. But the market is now constrained within a small range of 400 points and is struggling to take a decisive direction. Markets are trading overbought in the short term and majority of this rally has come on a slowed-down momentum as compared to the major uptrend. 15600 zone has been established as a strong support and until that breaks we suggest traders to maintain a cautiously bullish outlook. A decisive close above 15950 may trigger a test of 16200 on the higher side.

Expectations for week ahead

Quarterly results are likely to gather pace and be fully up and running by the close of this week. Given that India Inc. was under severe lockdown in Q1 last year, it might not be wise to compare results on a year-on-year basis given the low business activity back then. As a result, a sequential comparison combined with the outlook given by managements will give more clarity on future prospects. Investors should not buy aggressively at these levels, despite the benchmark index returning 7% in Q1FY22 and broad-based indexes shooting one way up with valuations blowing through the roof. Nifty50 closed the week at 15923.40, up by 1.49%.

(The writer is head of equity research at Samco Securities. Views expressed are personal)