IPO boom, market gloom

The IPO market is on fire. For the last several months, there has been a series of new issues (IPOs) hitting the market. They range all the way from NSE’s Rs24,000 crore issue to smaller issues raising amounts between Rs1,000 and Rs10,000 crore. These numbers weren’t even thought of in our markets less than 10 years ago! In addition, there have been issues well below the Rs1,000 crore mark. All of them have been fully subscribed – with many receiving large oversubscriptions. This year, new issues could raise Rs2 lakh crore.

However, what comes as a surprise to many is that the broader markets have remained flat for over a year. A large number of foreign institutions have been pulling money out of their existing investments, but at the same time subscribing to new IPOs. Domestic institutions have been taking up the slack, but not aggressively enough to move the overall market upwards. 

We see the same phenomenon happening in other major markets globally – particularly in the US. There are mind-boggling sums being invested in AI and computer infrastructure by institutions and companies. Yet the broader market is going nowhere. And in the US and in India, it is largely institutional money driving the main thrust, while retail markets are playing a supporting role. Of course, in the US, the institutional markets are much bigger and more diversified than in India, with pension funds, private equity firms, insurance companies and large foundations. To develop a stronger domestic base and become a major global market, in India too, we will have to give our institutions, PF and retirement funds and foundations or trusts, a wider investment remit. But that is a story for another day.
One explanation for this development in the markets is that globally, the bigger and richer are becoming bigger. There is strong growth in the US, in AI and its infrastructure, and in India, government spending on infrastructure such as new highways, metro lines, and energy is driving GDP growth. But, in both countries, the general public is hit by inflation due to high oil prices, the uncertainties of the two wars in the Middle East and Ukraine, rising housing costs and the lack of employment growth in India and slowing employment growth in the US. And in the US and Europe, there is public dissatisfaction with governments. In India, many are beginning to express their concerns about the government.

Looking ahead, what does this augur for us in India? At a macro level, there is no doubt that the economy will grow at not less than 6 per cent, which has become the new normal. And while the government keeps emphasising reforms, there is no move to let go of control! Whether we can continue to grow at 7 per cent or even hit 8 per cent will determine how soon we can really achieve Viksit Bharat.

But as long as the economy is growing, the markets will, as in the past, grow at around twice the rate of growth. The one lesson that Indian investors have learnt is to focus on the quality of the companies. Fortunately, there are still a large number of high-quality companies joining the line for an IPO. And the pace of IPOs will not slow down for a while. As long as investors are careful and don’t get carried away by overexuberance, our stock markets are still the best investment avenue.