Is the Fad fading away?

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Indian bourses maintained their bullish approach as Nifty reclaimed the 18000-mark! Even though the market has been robust since the start of the New Year, it has certainly not been a dream start for the so-called new-age companies.

From the beginning of this year, these companies have slumped in the range of 0.35% to 16.23%. Interestingly, owing to the fad around these stocks, a short-lived FOMO-driven euphoria was observed post-listing as investors sought a piece from this pie.

While the new-age companies have promising growth opportunities, they continue to burn cash and have no clear trajectory to profitability. In the face of such uncertainties and a higher-than-normal likelihood of failure, these companies knocked on the door of public markets with sky high valuations.

Unfortunately, novice investors who invested at these valuations, may now feel trapped. Since the returns expected from these companies are heavily reliant on them delivering on their promises and their growth eventually trickling down to profitability, it becomes important to consider whether all of these companies will succeed or not.

If we draw a comparison to the dot-com bubble during 2001, the valuations of tech companies were as frothy. At that time about 40% of the companies in Nasdaq 100 were loss-making. Out of the loss making ones, only 34% have managed to survive, and less than 10% have beaten the index over the last two decades by delivering returns greater than 9.5% CAGR.

In India, as the ecosystem of these new-age companies is still in its nascent stage, it remains to be seen how many of those already listed and the ones about to make their public debuts withstand the test of time and succeed. As a result, an important message for investors is to avoid falling victim to fads and FOMO. Instead, they should look for new-age companies with strong economic moats, efficient capital allocation, and the ability to deliver healthy returns as investment options.

Event of the week

The Index of Industrial Production (IIP) for November which came in at 1.4% was a disappointment, with output in all three sectors- manufacturing, mining and electricity, reducing significantly. This signalled a weakening of pent-up demand. Another important macroeconomic indicator released this week was the Consumer Price Index (CPI) inflation rate, which climbed to 5.59% in December. Though this was lower than the market expectations, it was the highest in over six months.

While domestic inflation increased, what is more concerning is that US inflation reached a four-decade high. This clearly suggests that the Fed’s hawkish stance will remain firm. Back home, the RBI faces a critical situation due to the low IIP and high CPI. Going forward, while IIP is expected to remain sluggish because of the potential slowdown induced by Omicron, the RBI will need to balance both growth and inflation in its February policy and may prefer to hold off on policy rate hikes.

Technical Outlook

Nifty 50 index closed on a bullish note for the fourth consecutive week, reinforcing the end of the 3 month corrective phase. Nifty Energy and Realty remained the top gainers, whereas almost all sectoral indices ended in the green. While the resistance of 17,950 has been decisively broken, the benchmark index now seems to be targeting its previous all-time high. We suggest traders maintain a bullish bias on the market.

Having said that minor dips cannot be ruled out going ahead and dips around immediate support levels can be used as buying opportunities. Immediate support for Nifty is now placed around 17,700 levels.

Expectations of the week

Quarterly results will impact market sentiment and be the talk of the town next week as they begin to accelerate. With the expectation that companies would maintain their momentum from the previous quarters into the third quarter as well, investors may see whipsaw movements as earnings surpass or miss the mark of market forecasts.

Furthermore, China’s quarterly GDP data is due next week, which could influence market sentiment globally. Amidst the volatility, investors are advised to tread with caution and assess the company’s long-term prospects rather than basing their investment decisions only on quarterly results. Nifty closed the week at 18,255.75, up by 2.49%.

(The writer is the  Head of Equity Research, Samco Securities. Views are personal).