There has been much print and cyber space used for those claiming to be pro-markets and their opinions about keeping the capital markets open, despite the daily free-fall of the indices.
How much more hurt can the Indian retail investors take? With markets being highly volatile, the hurt is felt highest by the retail investors as they cannot get out quickly from the markets as institutional investors do/can. Look at the data of 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 anywhere do not have the access to depth of research or options of algo-trading that most of institutional investors have.
With the fiscal year-end looming around in the next few days, the DIIs & 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 and hence should not stifle the market by shutting it. Arguments have been made about capital markets providing liquidity too. 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 were used to the concept of cash, gold and real estate. Slowly over the past two 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 two years of liquidity crisis in the economy, fixed deposits & equities (direct or through mutual funds) have been seen as a safer alternate 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, intraday fall is not high, whereas in our market, even the Sensex is volatile. And these are unusual global conditions.
There would be an argument on what if liquidity gets stuck for investors if the market is closed. As well as what 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 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.
Therefore, 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 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, then It will have implications on governance (who will be the effective new management controller? Who runs the board if the promoter still controls or influences the board?), bank & other lenders exposure (as their debt is exposed to vagaries of the market) and many more. Also, with the action of rating agencies on any such scenario, the particular stocks react violently in terms of price correction. Who bears the brunt of it? The guess is right – it’s the retail investors.
Extraordinary situations like this, 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 few days.
That’s where the fifth “P” comes into play – “Policy”.
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