Expert view: This roaring bull market has hues of irrational exuberance

“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes the by-product of the activities of a casino, the job is likely to be ill done,” J M Keynes.

This famous quote from the eminent economist J M Keynes, analysing the factors that led to the Great Crash of 1929 and the Great Depression that followed, emphasises the harmful consequences of excessive speculation on the markets and the economy at large.

In the Indian economy, which is booming now, speculation in stock markets is only a bubble on a steady stream of enterprise. But there are red flags that signal dangers ahead.

Excesses of bull markets

Bull markets produce some excesses. The excesses manifest in different forms, such as elevated hard-to-justify valuations, hyperactivity by gullible retail investors even while professional and institutional investors turn cautious, and irrational exuberance in the IPO market.

Some of these excesses are evident in the ongoing bull market in India. A matter of serious concern is the irrational exuberance bordering on insanity in the SME segment of the IPO market.

The explosive growth in the number of demat accounts from around four crore accounts in early 2020 to above 17 crores accounts now has created an unprecedented trend of newbies indulging in hypermarket activity.

The impressive rally in the market, which saw the Nifty more than triple from the Covid-19 low of 7,511 in March 2020 to around 25,000 now, has given the newbies excellent returns. The returns from mid- and small-caps have been spectacular.

More importantly, the rally has been almost one-sided, without significant corrections. Driven by prospects of higher returns, the newbies have been venturing into F&O trading without realising the risk.

Explosive growth in speculative trades

India leads the world in F&O trades, with the trading volume reaching ₹8,740 trillion in March 2024, compared to ₹217 trillion in March 2019.

F&O plays a role in hedging, but what attracts the hordes of traders, particularly the newbies, is the lure of quick money. The fact is that the vast majority of retail investors are losing money in speculative activity. 

A SEBI study found that 89 percent of retail traders were losing money, with an average annual loss of ₹1.1 lakh in FY22. In intra-day trading, 70 percent of traders are losing money. It is estimated that around ₹50,000 crore is lost in F&O trading every year. 

The SEBI chief Madhabi Buch recently remarked, "At a macro-level, we are worried that the household savings are not going into capital formation but into speculative activities.”

The SME IPO mania

The SME segments of the stock exchanges are witnessing hyper-speculative activity. The regulatory framework for SME IPOs is weak since the approvals are given by the exchanges and not the SEBI. In a recent IPO in July 2024, an SME, ‘Resourceful Automobile,’ was oversubscribed 400 times for its ₹12 crore IPO. 

The fact that an SME with eight employees selling motorcycles in two showrooms is getting subscriptions worth nearly ₹4,800 crores is a clear red flag. 

There is rampant speculation in the SME market segment. The SME exchange ecosystem needs more transparency, and all market participants have to exercise due diligence.

The Indian economy is doing very well, and the stock market is at record highs. Now is the time to make the right decisions.

Dr V K Vijayakumar is the Chief Investment Strategist of Geojit Financial Services.

Disclaimer: The views and recommendations above are those of the expert, not Mint. We advise investors to consult certified experts before making any investment decisions.