As Greater Fool Theory plays out in IPO mart; bulls charge everywhere

Nifty hit another lifetime high this week! The market has been on a dream run for the investor community this past year with successive highs, wherein not just the benchmark indices but also the smallest stocks have seen a strong momentum.

The trend wasn’t restricted to India alone, and swept far and wide across the globe. US and Chinese economies have been witnessing accelerated demand, which put upward pressure on inflation. India, au contraire, is experiencing heightened inflation above its 6% comfort level, mainly because of an increase in fuel prices instead of pentup demand; a point to prude upon given that crude prices are expected to continue rising higher due to supply crunch.

Usually, rising inflation is synonymous with GDP growth i.e. improving economy and equities have done well when inflation is at slightly higher levels, but not too high. The US Fed as well as RBI’s onerous stance on not hiking interest rates immediately very well reflect this fact.

On one hand, we see inflation rising and on the other, bond yields are witnessing a dip. Now when bond yields were on an upward trajectory, there were varied concerns, and while they are tapering, the fears are different. Not only this, cautionary signs are coming from all other places too, in the form of a slippage in GST collection below the Rs 1 lakh crore mark to soaring India’s debt-to-GDP ratio, which now stands at a 14-year high.

While the macros keep oscillating from positive to poor economic outlook, what remained constant over the past year is the fact that the market has paid no heed to any one macro data point, and in the larger scheme of things, they have continued to tread its path towards new highs.

Investors who have ridden the rally without paying attention to the short-term noise greatly benefitted and doubled their returns. That is the power of staying invested through the thick and thin of markets.

Event of the Week

IPOs continue to amuse investors and when it accompanies a bull rally, the interest magnifies, as the promoters and PE investors benefit from handsome valuations. Tactically, only a small portion of the issue is allocated towards retail and their excitement soars each time it gets oversubscribed, courtesy lack of supply. Valuations may raise some eyebrows, but as long as promoters and PE investors are able to find buyers willing to pay a price, they stand to benefit from the IPO.

This trend holds true for both retail and institutional investors as well when they pursue IPOs for ‘listing gains’ confident in their belief that they will find someone who will be willing to pay a premium post listing. This vicious cycle, called the ‘Greater Fool Theory’, implies 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

The Nifty50 index closed positive for the week, however, the market is now confined within a small range of 400 points and is struggling to take a decisive direction. The market is trading overbought in the short term, and the majority of this rally has come on a slowed-down momentum compared with the major uptrend. The 15,600 level has been established as a strong support and until that breaks, we suggest traders maintain a cautiously bullish outlook. A decisive close above 15,950 level may trigger a test of 16,200 level on the higher side.

Expectations for the Week

Quarterly earnings are expected to pick up pace and be in full swing by the coming week. Since the country was under lockdown in Q1FY21, a YoY comparison might seem magnified due to a lower base.

Hence, sequential comparison along with management insights will be more beneficial from a future growth perspective. As the benchmark index delivered a 7% return in Q1FY22 and the broader indices shot up one way with valuations going through the roof, investors shouldn’t invest aggressively at these levels. Nifty50 closed the week at 15,923, up 1.49%.

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