Srinath Sridharan
There has been a lot of noise from those claiming to be pro-markets about keeping the capital markets open, despite the daily free-fall of the indices.
How much more pain can the Indian retail investors take? With markets being highly volatile, the pain is felt highest by the retail investors as they cannot get out as quickly from the markets as Institutional investors can.
'Fall in valuation, opportunity for investment but be selective'
Look at the data of the proportion of retail investors in any major stock. It has increased not due to their love of those stocks, but due to the institutional investors exiting those stocks before the retail investors could!
Retail investors do not have access to the depth of research or options of using algo-trading that most of the institutional investors have.
With the fiscal year-end looming around in the next few days, the DIIs and FIIs will exit to stop losses or book profits, further!
Also, there would be arguments by some economists, that we as an economy are free markets, hence, should not stifle the market by shutting it.
Arguments have been made about capital markets providing liquidity. Yes, but at whose cost or capital? The current economy reminds me of the adage “Return OF capital is more important than Return ON capital”.
We are not a mature financial market. Or a deep economy yet.
So the folks who get hurt the most in a volatile growing economy are the retail investors.
For an economy, where financial instruments had been few in number, we have used the concept of cash, gold, real estate.
Slowly over the past 2 decades, we had built consumer confidence in our bourses to participate in equities market investments. The mutual fund industry has been doing yeomen service in building consumer confidence.
However, in the past few years of structural shifts with the introduction of demonetisation, RERA, GST and the past 2 years of liquidity crisis in the economy, fixed deposits & equities (direct or through Mutual funds) have been seen as a safer alternative to investing option.
With banking industry having its own imagery issues due to NPA clean-up, FDs started moving to PSBs. Typically, in mature capital markets, intra-day fall is not high. Whereas in our market, even the Sensex is volatile.
There would be an argument on what if liquidity gets stuck for investors if the market is closed, and how will global investors feel? The counter view is this: when did the global investors stay invested for love of anything but profit-booking?
It’s a capitalist philosophy, as long as the stability of policy and regulation is assured. Global investors have the opportunity to see which markets they can make money on and hence keep allocating and reallocating their portfolios.
So it’s a fallacy that we need to keep our markets open for global investors, at the pitiable condition of our domestic retail investors, who are losing their shirts daily in the market mayhem.
Fund managers have been speaking of staying invested and making fresh investments to create “value-opportunity”. Data does not show that many of those managers have actually put their funds into the market, some of them due to redemption pressures on their funds.
The “big elephant in the room” in the markets is the proportion of promoter pledge to the total market capitalisation of the markets.
With falling stock prices, each of these pledges are going to be called - either for additional security cover to be placed (that could mean additional promoter pledge) or liquidity support from the promoter (which looks highly unlikely).
The past fortnight itself has shown few promoters including large groups as well as financial institutions sell their holdings or bring in additional security cover.
The big question is that if these promoters are going to lose control of their companies anytime soon with any further price fall. It has implications on governance (who will be the effective new management controller?; who runs the board?), bank & other lenders exposure (as their debt is exposed to vagaries of the market) and many more.
Also, with rating agencies action on any such scenario, the particular stocks react violently in terms of price correction. Who bears the brunt of it? You guessed it right - the retail investors!
Extraordinary situations like these need extraordinary decisions - without bothering about precedence! Save the domestic retail investors! Let’s use our moral compass of being an all-inclusive society; we can afford to be without capital markets for a few days.
That’s where the fifth “P” comes into play - “Policy”.
(The author is Independent markets commentator)
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Source:- moneycontrol.com