Indian equity markets have gained 35% in the year till date. With the rise of Modi Government and amidst reform euphoria, the markets seem to have ignored the real recovery signs and are just riding on optimism. And the same has brushed on the IPO market.
'It is only when the tide goes out that you will learn who's been swimming naked'... This well known quote legendary investor Warren Buffet deserves a mention here. In an uptrending market, all good, bad and ugly issues may find takers. The real value of these will be reflected in the long term depending upon how they fare on fundamentals.
With fresh public issues hitting the market, investors need to be very cautious while putting their bets and not get carried away by the market frenzy. They should understand that when everyone around in the market is getting greedy, it is time to be cautious.
This is exactly the advice private equity funds who have invested in India are following. As an article in the Wall Street Journal suggests, these companies that had invested in India 5 years back at the time of optimism are still struggling to exit. Due to the slowdown that followed, these companies have not been able to generate expected returns. However, with strong sentiments ruling the markets and IPOs finding back the favour, they are hoping to sell their stakes. Moreover, they are in no hurry to make fresh investments.
You see, despite all the hype, a real recovery is yet to be seen. Most of the positives in the last few months, be it reforms or positive economic data have been more because of global factors such as decline in oil prices etc , rather than a material change in the fundamentals of the economy. Indian economy is already running the risk of overshooting fiscal deficit target. The reforms such as diesel deregulation are yet to face the test of high crude price scenario. Meanwhile, the market valuations and optimism seems to getting ahead of fundamentals. In such times, investors should stick to bottom up approach and disciplined investing rather than joining the frenzy.