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In his early days as finance minister, Manmohan Singh had famously said, ‘I won’t lose my sleep over the stock market.’ Those were different times. No finance minister today has that luxury. With the post-tax return on fixed deposits plummeting to 4%, way below consumer inflation, more and more investors are driven towards equities, notwithstanding the risks.
Those who do not trust mutual fund managers — whose performance has not exactly been stellar — are directly betting on stocks. They have little choice: gold, though a safe haven, is an idle asset; properties require large investments; and, exotics like Bitcoins are not everyone’s cup of tea. So, despite cut in salaries, job losses, insecurities and net outflow from equity funds — with some investors stopping SIPs while others are pulling out money to stay afloat —new demat accounts are being opened, and retail investors’ holding in listed companies has touched an 11-year high at 7%. The story is playing out in a market that has run ahead of fundamentals: the Sensex is trading at 31-32 times its earnings against an average price-to-earnings multiple of 20 in the last two decades.
Twice in the past when the market was almost as expensive — in mid-2018 (P/E was 30) and at the beginning of 2008 (P/E at 28), sharp corrections followed. In such a milieu, Monday’s correction was a reminder that jumpy traders will sell at the hint of trouble and steep valuations come with volatility. For both investors and the government, the message is simple. Besides companies with good governance and agile management, investors must look for businesses they understand and should not give up on SIPs. New Delhi must remember that investors would, either readily or hesitantly, continue to be lured by stocks; and, while the world has to live with nasty surprises (like a new strain of virus), a growing constituency whose fortunes are linked to stocks looks up to the government for guidance and stable policies. A reversal of that fortune can cast a shadow on savings and consumption.
This piece appeared as an editorial opinion in the print edition of The Economic Times.