2016-17 was quite an extraordinary financial year. It was spectacularly unpredictable on the macro front. Few would have predicted that the rupee would have closed the year stronger at 64.9 vs the dollar after opening at 66.36. Fewer would have predicted that the NIFTY would deliver 18.9% returns after the kind of selling we saw both at the beginning and the end of calendar year 2016. Oil rose spectacularly by 35.6% from $33.69 to $49.89 vs the dollar during the year. And, we always thought rising oil would spook our markets. So what really went right in 2016-17? Have Indian markets found the resilience Mojo?
What we are going to say now will not please the players who are material to markets. The truth is that 2016-17 saw two kinds of concentration of capital. The first was in widely owned index stocks which have a higher weightage in the NIFTY. Mutual funds and FIIs have flocked into the private banking pack and pivotal stocks like ITC, Larsen and HDFC. By allocating very heavily to financials and widely owned stocks, institutions have done two things. One, they ensured the NIFTY stayed higher. Two, they protected their backside. The other type of concentration was worse. And, the data pointer is scary. The NSE Mid-cap 100 trades at a multiple of 33 while the NIFTY itself trades at 19 times FY 2017-18. Domestic funds and HNIs have concentrated capital flows into about 100 mid-cap & small cap stocks during 2016-17. These stocks were not liquid enough and did not have enough room to take in the flows. The flows naturally led to swelling their valuations. But swollen rivers don’t hold water. And, like in nature, we will see the water flow out in other directions in 2017-18.
The good news is that we will have a lot of quality paper getting supplied through IPOs, OFSs and QIPs. But investors must understand their own goals and not get distracted by the market’s animal spirits. Remember, when money chases ideas, it all looks very festive and carnival like. And, Carnivals don’t last too long. So, one should bet on the flows getting moderated into better parts of the economy. Valuations will start to level off when this happens. Our investment choices must reflect the future.
You can be sure of an investment idea. But, you are never sure of the investment horizon.