Back in the last week of May, when the Modi rally on the equity markets was still young, I'd written about equity investors who had become eager to book profits and run away from investing as soon as a market rally had gotten going. At the time, I'd written that given the state of the economy--and of many businesses--the coming months would not be easy but investors would be foolish to behave in a once-bitten, twice shy manner. At the other extreme were investors who had assumed that it was party time for all kinds of stocks and that we were heading for an indiscriminate rally that would raise all boats, no matter how leaky.
Now, when things have calmed down a bit, both sets of early reactions look overdone. Equities haven't collapsed after a quick celebratory rally, as the book-profit-and-run crowd feared, but nor have they run away with themselves. It's the kind of period where future hope and expectation points one way and past reality quite another.
There's no doubt that there is a huge upturn in business sentiment. Businesses of all sizes and shapes are planning and working with an assumption of growth and a better environment. However, as the quarterly numbers that are coming in show, India's corporates are a long way from healing. Until we get to a point where interest rates actually start falling, there isn't going to be a meaningful revival. We'll get there, but it won't be in a hurry and there'll be a lot of casualties on the way. Debt-laden companies will continue shed assets which they will call non-core, although they'll actually flog anything and everything that can be sold. Many of the dead and dying stocks that shot up last month are now subsiding, no doubt close to their previous level.
For investors, the moral of the story is simple--mood and sentiment matter in the short run, but eventually only quality does. As we move towards the long-awaited revival, there will be a lot of distractions, far more than there are when there's no hope of businesses and the markets doing better.