VR Logo

A Risk Phenomenon

Markets remain ravaged even though risk has again disappeared from them

The disappearance of risk. The reappearance of risk. And now, the re-disappearance of risk? From a certain perspective, that could be the story of investor attitudes over the last six or seven years. From about 2003 to 2007, practically anything that an investor did seemed to work and risk seemed to have disappeared from the investment markets. So much so that investors forgot what risk looked like and perhaps even forgot that there was something called risk. And then, last year, risk came. He embraced us, all like a long lost friend who is so enthusiastic that he doesn't look like he would let go for a long time. But he did let go, and now seems to have disappeared again and we could slowly be forgetting what he even looked like.

However, the evidence of his last vigorous visit is still all around us. I compared the current value prices of some 3,000 stocks and the net asset values (NAVs) of 268 equity mutual funds with their median prices of December 2007, which was the last time anyone was in a mood to ignore risk. A vast majority of investments are still deep in the red compared to those earlier levels. More importantly, the depth of losses, that many investors are carrying, are far greater than the headline numbers suggested by the indices. Among equity mutual funds, as many as 20 out of 266 funds are still 40 per cent or more lower than that time, a period from which the Nifty and the Sensex are only about 25 per cent lower than they are today.

What is worse is that about 60 per cent of stocks (though only three per cent of funds) are still worth less than half of what they were in December 2007. In fact, about 1/4th of stocks are not only worth less than a quarter of their earlier peak value, but are completely stagnant. These are the walking dead, the zombie stocks from which all value will now ebb away because the value in these businesses was all initial public offers (IPO) smoke and mirrors anyway. This phenomenon repeats itself with sickening regularity in every market cycle in India and there's nothing that our vast regulatory and monitoring apparatus can do to prevent it.

What is most instructive is a close look at what kind of stocks and funds do the zombies belong to. It almost goes without saying that an overwhelming chunk of them are small and medium-sized stocks that are directly and indirectly related to the realty and infrastructure sector - the core of the bubble where stories were easier to create. This time around, it isn't clear where the center of the bubble will eventually lie, but if you want to avoid being deep in the embrace of Mr. Risk the next time he makes one of his visits, then you need to stay clear of the stocks and sectors that will become the storytellers' favourite.