FOMO-driven euphoria hit investor sentiment; time to pick new-age players with strong basics

Indian indices continued their bullish stance as Nifty claimed the 18,000-mark. While the market has been buoyant since the start of the new year, it has certainly not been a dream start for the so-called new-age companies.

From the beginning of 2022, these companies have plunged in the range of 0.35 per cent to 16.23 per cent. Ironically, due to the fad around these stocks, a short-lived FOMO-driven euphoria was witnessed post-listings when investors looked to grab a piece from this pie.

While the new-age companies have promising growth prospects, they continue to burn cash and have no clear path to profitability. Amid such uncertainties and a higher than normal probability of failure, these companies knocked on the door of public markets with massive valuations.

Novice investors, unfortunately, feel trapped by investing at such pricey valuations. As the returns expected from these companies can be majorly pinned to them delivering on their promises and their growth ultimately trickling down to profitability, it is important to ponder upon whether all these companies will succeed.

If we draw a comparison to the dot-com bubble during 2001 when valuations of tech companies were as frothy, at that time about 40 per cent of the companies in Nasdaq 100 were loss-making. Out of these loss-making ones, only 34 per cent have managed to survive and less than 10 per cent have outperformed the index over the last two decades by delivering returns higher than ~9.5 per cent CAGR.

In India, as the ecosystem of these new-age companies is relatively at a nascent stage. We are yet to see how many of these already listed and the ones lined up for their public debuts pass the test of time and succeed.

Therefore, a key takeaway for investors is to not be a victim to fad and FOMO. Rather they should pick out such new-age companies that have strong economic moats, efficient capital allocation and the capacity to deliver healthy returns as investment candidates.

Events of the week

India’s industrial growth, based on the Index of Industrial Production (IIP) for November was a big disappointment at 1.4 per cent, wherein the output of all 3 sectors – manufacturing, mining and electricity declined, indicating weakening of pent-up demand.

Another key macro-economic indicator released this week was the Consumer Price Index (CPI) inflation number which jumped to 5.59 per cent in December.

Though this was lower than what the market was expecting, it is the highest in over six months. While domestic inflation rose, what is rather worrying is the US inflation, which came in at a four decadal high. This clearly indicates that the US Fed will remain firm on its hawkish stance.

Back home, the low IIP and high CPI pose a critical situation for RBI to deal with. Going forward, as IIP is expected to remain weak given the possible slowdown caused by Omicron, RBI will need to balance both growth and inflation in its February policy and may rather wait to push the peddle on policy rate hike.

Technical Outlook

Nifty 50 index closed on a bullish note for the fourth consecutive week, reinforcing the end of the three-month corrective phase. Nifty Energy and Realty remained the top gainers, whereas almost all sectoral indices ended in the green.

While the resistance of 17,950 has been decisively broken, the benchmark index now seems to be targeting its previous all-time high.

We suggest traders maintain a bullish bias on the market. Having said that, minor dips cannot be ruled out going ahead and dips around immediate support levels can be used as buying opportunities. Immediate support for Nifty is now placed around 17,700 levels.

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