Tuesday, October 6, 2009

Investors have two faces: Fear & Greed

MUMBAI: Everyone knows that fear and greed are the two key factors that drive the stock market. If you talk to any seasoned investors in the market, they would regale you with stories of how people got carried away by greed and lost all their money in the process. Stories about people spooked by ‘fear factor’ also do the rounds of Dalal Street at regular intervals. According to a study by SMC Capitals, “the elements of fear and greed are clearly visible in the trends of allocation of assets by the investors in terms of cash and stocks.’’

The trend, says the study, can be seen at the levels of market cap and bank deposits in the economy. When there is fear among the investing community, the bank deposits go up. And, when there is widespread optimism , the market cap levels go up. “If you look at investor behaviour in the last three years, the pattern is very clear: the first year was of over-optimism, the second was of over-pessimism and now it’s the recovery period. This trend is clearly visible if you look at the market cap and bank deposits (or the real wealth),’’ says Jagannadham Thunuguntla, equity head of New Delhi-based SMC Capitals.

In the study, SMC has compared the BSE market cap from the period starting January 2007, with the aggregate bank deposits in the banking system. The relative measure of the entire market capitalisation of BSE as a percentage of aggregate bank deposits in the entire banking system demonstrates the mindset of the investor community.

For example, in January 2007, the BSE market cap as a percentage of aggregate bank deposits was 152%, which means BSE market cap is 1.52 times more than the entire bank deposits. The figure kept on racing ahead during 2007 as the bull market gathered further momentum. By the time the bull market peaked in December 2007, the figure has reached 235%.

This means that with the deposits available, the banks couldn’t even buy half of the BSE stocks. At that time, the aggregate bank deposits were to the tune of Rs 30.47 lakh crore, whereas the BSE market cap was at Rs 71.69 lakh crore, probably signalling the exuberance in the capital market. By the time the bear market commenced in 2008, the BSE market cap as a percent of aggregate bank deposits kept falling. When the markets touched the bottom in February 2009, it had slid to 74%.

This means the entire listed stocks on BSE could be bought with aggregate bank deposits available with the banking system and it will still be left with 26% of the deposits. By this time, the total BSE market cap was to the tune of Rs 28.62 lakh crore, whereas the aggregate bank deposits were to the tune of Rs 38.48 lakh crore. Now, as the markets have started recovering since March 2009, again this level of BSE market cap as a percentage of aggregate bank deposits has crossed 100% levels and currently it stood at around 129% in August.

IDBI Bank’s executive director and head of personal banking C S Jain said, “Whenever there is fear among investors, they tend to go for bank deposits. Though there has been a rise in bank deposits during the last three years, the trend has been of people going in for short-term deposits that had a tenure of less than a year as they expect markets to bounce back and route their money to stocks,’’ he added.
-Madhu T & Reeba Zachariah, ET Bureau

No comments: