‘New money’ vs ‘Smart money’: Who will have the last laugh?

Vintage incandescent bulbs on old wooden table. This file is cleaned and retouched.

A distinguishing characteristic of the ongoing bull market is the exuberance of the retail investors. The availability of modern tech platforms that enable trading from anywhere and the abysmally low cost of trading have attracted large number of retail investors to the market. Also, Work From Home (WFH) and the   consequent gain in travel time have given the modern tech-savvy retail investors access to markets and time to trade. This has coincided with the ultra-loose       monetary policy being implemented by the leading   central banks of the world, resulting in the injection of huge liquidity in the global financial system, and the consequent crash in interest rates to near zero levels in the developed world. Poor returns from fixed income assets have pushed many youngsters into the stock markets, which have been giving stellar returns since April 2020.

Retail investors are now a force to reckon with

The emergence of retail investors as a powerful bloc in the stock markets is a global phenomenon. It is more pronounced in India. According to data from Prime   Database retail investors now account for around 45% of cash market transactions on the Indian stock           exchanges.

This category of newbie investors has some common characteristics. They have never experienced a bear market. They don’t know much about fundamentals like valuations and macroeconomics, which have huge bearing on markets in the long run. But, lured by the impressive returns from the market, they have been trading merrily. And, more importantly, they have      benefitted from the almost one-way rally in the market since the crash of March 2020.

‘Smart money’ vs ‘New money’

Institutions, which represent ‘smart money’, have been skeptical about the rally. FIIs have been big sellers in the market in July having sold equity worth Rs 11308 crores. At around 15600 Nifty, India’s market cap to GDP ratio moved towards 110% against the long-term   average of around 77%. The one-year forward PE crossed 21 against the long term average of around 16. These are clear indications of rich valuations. This might have prompted the FIIs to sell. But the retail investors who have been buying all the dips promptly absorbed all the FII selling pushing the markets further up. And when the Nifty range of 15600-15900 was decisively broken on the upside, it was clear that the market would move to the next higher level, which it did. This has forced the FIIs to come back to the market on fears of losing the momentum. The ‘smart money’ has been pushed back by the ‘new money’, at least for now.

Who will have the last laugh?

It is well known that the accommodative monetary policy of the leading central banks of the world, particularly the Fed, is a major driver of this global equity rally. It is also feared that when the accommodative monetary policy is withdrawn, it might lead to a major correction in stock markets. Going by the current indications, the Fed is likely to start ‘tapering’ by end 2021 or early 2022 and may indicate policy normalization after that. Rate hikes are expected only in 2023. But bond yields will start hardening in 2022 itself and money will flow from equity to bonds. This can trigger sharp market corrections. But the bullish view is that ‘tapering 2.0 ’ and the eventual normalization will be well communicated by the Fed to avoid a repeat of the 2013 ‘taper tantrum’.

It is possible that if the nascent global growth    sustains and accelerates in 2022, earnings will catch up to justify the lofty valuations. Even then, a sharp market correction is possible. FIIs who are sitting on big profits may turn big sellers. The billion-dollar question is: can the retail investors and DIIs absorb this potential flood of selling by FIIs? Will the smart money overwhelm the new money? We will have to wait and watch.

Stay invested, but be cautious in committing new money

It makes sense to remain invested in a bull market since markets can surprise on the upside. Investors can remain invested in sectors with good earnings visibility like IT, metals, construction, pharma, leading financials, specialty chemicals and FMCG. But investors should be cautious in committing new money at these elevated market levels. Bulk investment should be done only through STPs (Systematic Transfer Plans). SIPs should be continued. History tells us that wealth is created through systematic long-term investment.

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Chief Investment Strategist, Geojit A highly respected figure in academic circles in Kerala, Dr Vijayakumar is a keen observer of financial markets.He was  Expert Member, Working Group on NBFCs, Planning Board, Govt. of Kerala and has lectured at the CEU (Central European University), Budapest, Hungary as Visiting Faculty in 2006. Dr Vijayakumar is known for his articles and pre or post-budget TV discussions. He regularly addresses Investor Meets organized by the company and offers investment advice to both new and savvy investors.


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