
In years when investors find the market returns unattractive, they tend to save less. They choose to consume more, spend more, and invest less. This tendency stems from the belief that investing can wait for a more opportune moment. When investors postpone investing, they tend to spend the money, leaving very little to invest later. The outcome is that most investors tend to be underinvested during such phases.
However, investing more when recent returns are not looking attractive could actually work very well. Such thinking builds into a counterintuitive approach that seeks opportunities when the market appears lackluster and deploys more money when the consensus view is not in favour. We do get such opportunities from time to time. Every crisis—geopolitical or economic—throws up such chances.
But the current trend seems to be drifting away from that scenario. Opportunities to invest counterintuitively are only getting fewer. This is naturally turning investors and managers anxious to buy, especially when markets hardly react even to something as worrisome as an Iran-Israel conflict. Nobody wants to sit on cash.
Currently, the market looks very enthusiastic to deploy capital. Going by the manner in which promoters are comfortably placing their shares with institutions and IPOs are making a swift comeback, this market is heavily consensus-driven. Investors are anxious to deploy capital because they fear that opportunities are getting fewer.
As time passes, this anxiety leads to hurried decision-making and rapid deployment of capital. There is no rationale to justify this behaviour. While there are pockets of undervaluation where investing makes sense, these areas aren’t quite attracting money. Expensive parts of the market continue to attract most of the capital.
If and when broader market valuations soften, the investments being made now in haste may face significant drawdowns. This is not something investors or managers are factoring in while making decisions. Judging the downside and estimating the extent of any future fall would definitely moderate investor behaviour and have a sobering effect on decision-making.
But right now, we are still seeing investment anxiety drive choices, and that definitely affects how capital is being deployed in larger tranches. This will not go without future consequences.