The period between June 2020 and September 2021 was one of the best for the Indian equity market but 2022 is turning out to be a gut-wrenching time. The liquidity/volumes in the market have fallen by half and correction in small- and midcaps in India is severe.
All the hyped growth stocks—even the likes of HDFC Bank, Asian Paints and Divis Labs—apart from cement and metal stocks are taking a beating. The sea (broad market indices like the Nifty and Sensex) appears calm but there’s an undertow lurking in both global markets and Indian mid- and small-cap stocks.
Nearly 50 percent of the stocks are down by roughly half from their 52-week highs. The average fall is around 38 percent from their all-time highs. In the US, the S&P 500 has seen one of the worst starts of the year and the NASDAQ is down by more than 20 percent (officially, this is said to be the start of a bear market) and the darlings of the COVID period like technology initial public offerings or IPOs, SPACs or special-purpose acquisition companies, cryptocurrency, etc. are down by 30-70 percent. So what went wrong?
Answer: Recency bias, or extrapolation based on recent events.
Not all growth is good
It was assumed that all the businesses that were growing at a good rate for the past decade or in the recent period would grow at this speed forever, and that led market participants to provide astronomical valuations to them. The most important thing for investors is to understand that not all growth is good. Sometimes growing beyond a certain rate actually kills a business.
If you look at Avenue Supermarts, HDFC Bank, Asian Paints and so on, you would conclude that all it takes to generate great returns in the equity market is consistent growth in revenues/operating
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