The Hindu Business Line : Market still finding its feet

Market is yet to find its feet on a shifting ground. The current psychology of various market participants suggests that the benchmark index may find it difficult to break a range of 1000 points this week.

Couple of months ago when the valuations were soaring, almost everyone seemed comfortable with the market’s “irrationality”. Now, when prices have gone downhill, there is no taker. Irrational?

John Maynard Keynes is right: “Markets can remain irrational longer than you can remain solvent”.

Behavioural change

The great Indian equity premium party is not over and out. But the recent convulsions are symptomatic of behavioural change in the market place. Practitioners of behavioural finance would find the goings-on on the Dalal Street interesting.

Behavioural finance acknowledges that behavioural anomalies may cause a wide divergence between the fair value and the market value. But these anomalies are unpredictable and chaotic, marked by mis-pricing and mistiming.

The market had gone through a period of overreaction in the recent past and the current phase is one of under-reaction to the almost same set of fundamentals. Did the market functioned efficiently or did a large number of rational profit-maximisers had actively been competing with each other trying to aggressively predict future market values of individual stocks? Were important information freely available to all participants? The answer is, interestingly, affirmative. It was also not difficult to capture the unsustainably of profitability of the then trading strategy. The current aversion is also not difficult to appreciate in view of the injuries perpetrated by the previous strategy.

Emotional content

Simply put, one finds a strong emotional content in the market’s behaviour – a collective greed in December or a pure play of fear in January and so far in February. Both raw forces gripped the market players and the corporates and led to anomalous results in aggregate.

Bur the real damage has been perpetrated on the mutual trust among clients, intermediaries, custodians of the market and the issuers. In terms of implementation of rules, many feel that they have been rubbed the wrong way.

Market is likely to take time to find equilibrium after two extreme reactions in quick succession. The key takeaways for investors are universal: sustainable valuations are not just a function of instant demand and supply and an apparent friendly system may turn unfriendly. If the lessons have strong imprint, this experience may help Indian stock market in its evolutionary process.

However, one cannot be sure. Remember the words of Albert Einstein: “Only two things are infinite, the universe and human stupidity, and I am not sure about the former”.

(Responses may be sent to jayanta_mallick@thehindu.co.in)

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