Opportunity for retail investors, after the IPO fall

The recent phenomenon in the IPO market could well be a blessing in disguise for retail investors.While the current bearish mood may look unnerving for fresh investors, it sure would have been less surprising for seasoned investors who have seen two consecutive years of negative returns in the current decade. With many IPOs hitting the roadblock and posting new records with their withdrawals, investors have had little to cheer about in the last one month. What has been more surprising is the fact that even institutional investors have got it all wrong in the current market meltdown, and have been more bullish than retail investors. Even at a time when indices were slipping into new lows, the panic selling from retail investors was largely from those who were margin traders. On the other hand, investors who had taken the mutual fund route were actually buyers in the last few weeks. While the current bearish mood may look unnerving for fresh investors, it sure would have been less surprising for seasoned investors who have seen two consecutive years of negative returns in the current decade. In fact, a source at a broking firm said that among margin account holders, it was only those who had suffered from the market scams, who were lucky to escape from huge losses. "For many others, the losses from margin trading were as huge as Rs 25-50 lakhs", he said. However, it wasn't a sad story all the day. Many of these investors had made handsome gains during the earlier quarters and their monthly profit cheques were to the tune of a couple of lakhs. Needless to say, that was during a time when liquidity and momentum overtook sanity. Sanity is back in the market and once again, fundamentals like PE ratios and margin pressures are back in focus. From a retail investor's point of view, the current market mood should be a blessing in disguise because companies looking to tap the IPO market will think twice before fixing the price. The market rally in the last four years had reduced the relevance of PE ratios and managements with minimum track record were benchmarking their issues with companies who have had a decade's presence. And more importantly, there was a flood of issues from sectors which were in the momentum which had given further boost to pricing. The withdrawal of issues should act as a warning to companies which get over aggressive with their pricing. Not only should it bring in stability in the IPO market, it should also make investors more realistic with their returns expectations. Though a lukewarm response to public issues is nothing new in a negative market (mood) scenario, the IPO market had not seen the kind of withdrawals as seen in recent times. For the sake of fresh investors, let us hope that it is not a short lived phenomenon as in the past. While IPOs have already dealt a blow to sentiments, let us hope the recent trend has also brought in the necessary correction in the secondary market expectation too. Though a bull market tends to spike the returns to unrealistic levels in the short term, history has shown that returns tend to get evened out in the long run. Hence, one needs to brace for an annualised return of 15-20 percent over the long term. Even at current market levels, there seems to be little threat for such returns as the domestic economy is expected to maintain its growth closer to nine percent. That would mean an earnings growth of over 15-20 percent for the corporate sector which should keep the Indian Inc growth story intact in the medium term. For those looking to build wealth over the long term, this should be comforting.