Don’t protect retail investors; not the regulator’s job to advise them on fluffy valuations

The point is retail investors need to fend for themselves; it is not the regulator’s job to advise them.

Large trading volumes are always good for the market because they help reduce volatility. To that extent, the big trading volumes are helpful; from a peak of 10,490 crore shares in June, the daily average volumes in the cash market—BSE and NSE—have fallen to 6,826 crore shares in August. But this is still higher than the volumes seen in September 2020. Retail investors, it is believed, account for a chunk of these volumes—close to 40-45%, higher than last year’s share. This has apparently created concern given the stock indices are soaring, and, with them, valuations.

The point is retail investors need to fend for themselves; it is not the regulator’s job to advise them.

Unlike in developed markets, where individuals invest through mutual funds, the equity cult is strong in India. The emergence of online brokerages—which, by some estimates, command 40-45% of the volumes—has made it easier to punt on stocks. That everything they touch is turning to gold, on the back of the liquidity sloshing around, is making them even more enthusiastic.

But, if the markets turn and they lose money—or their shirts—they will have only themselves to blame. They cannot expect any safety nets. The abundance of liquidity is prompting more investment in stocks at a time when real interest rates remain negative. That has driven up valuations, but whether these are stretched or justified is hard to tell; stocks today may appear hugely over-valued, but the point is they were looking over-valued even six months back. The bullishness has increased after India Inc turned in splendid results for FY21 despite losing three or four months to the pandemic, and hasn’t ebbed after the somewhat sedate June quarter results.

In fact, the numbers have seen moderate upgrades. Kotak Institutional Equities (KIE) upped its net profit estimates for the Nifty-50 set of companies, for FY2022 and FY2023, by 0.4% and 0.8%, respectively, compared to the start of the Q1FY22 results season. The brokerage expects 31% in FY22, followed by 14% in FY23, on the back of robust economic recovery and stable/modestly-higher bond yields. As such, the Nifty is valued at a price to earnings (P/E) of a shade over 23 times the estimated earnings for FY22 and at a P/E of just over 20 times for FY23 earnings.

These multiples may seem rich when compared to the past, but the global environment has changed. India is among the world’s fastest-growing economies, and the potential for growth is huge; that may not be true for all the 3,000-plus listed companies but it is certainly true for a very large universe.

It is no surprise, therefore, that strong brands—Asian Paints, for instance—command multiples of nearly 100. Investors seem not to care that the Nifty profits for the current year will be skewed by contributions from the financial sector, which is tipped to contribute a little less than 30% of the incremental profits, and the metals and mining space, which is expected to chip in with 36%. As long as everyone’s playing by the rules, there should be no problem. SEBI must keep strict vigil.