Retail investor frenzy likely to ride market’s stormy tide in the new year

The frenzy that started after March 2020 turned into a frenzy in 2021 when equities consistently outperformed traditional assets like gold and assets, while savings instruments like fixed deposits and bonds yielded lower returns.

Analysts are confident that liquidity crunch by global central banks could puncture markets in 2022, with India’s retail investors emerging as a major factor in equities.

According to Gaurav Dua, Head of Capital Markets Strategy, Sharekhan, by BNP Paribas, the normalization of monetary policy from withdrawal of excess liquidity by central bankers is expected to create some volatility in the short term.

They think the era of easy money is over, but India is on the cusp of a multi-year upcycle with healthy growth in corporate profits.

“Thus, the equity market is expected to perform well for the next few years. Many retail investors understand the opportunity and will continue to invest in equity markets.”

Indian markets have seen tremendous growth in the last two years. Benchmark indices Sensex and Nifty have gained over 20% after hitting several record highs in 2021 alone. In contrast, gold prices have fallen by 3 per cent this year.

Harsh Jain, co-founder and COO, Grow (discount brokerage firm) feels that the growth of retail investment is not limited to stock investments on exchanges (but also through mutual funds) and will continue in 2022 as well.

New demat accounts were created in 2021 at super rate. A record 27.44 million new demat accounts were created from January to November this year. Data from NSDL and CSDL shows that 3.24 million and 3.63 million new accounts were created in October and November, respectively. In contrast, 10.50 million demat accounts were created in 2020, the year when the participation of retail investors in equity markets started increasing.

As of November, India’s total demat account stood at 77.24 million, compared to 49.80 million at the end of 2020 and 39.30 million in 2019. A demat account is opened by an investor with a depository participant to invest in securities like stocks and bonds. Securities are held in a digital format.

There was a record number of demat accounts as an increasing number of millennials started moving towards dual or multiple income sources, and the stock market seemed to be a great investment option.

Dua believes that the increasing participation of retail investors is driven by limited opportunities to earn inflation-beating returns in a low-interest rate regime. “The proliferation of easy-to-use trading tech platforms offering low-cost services has also added to the attractiveness of equities as an asset class. Finally, the lockdown and work from home have allowed retail investors to generate returns from their investible funds. Allowed to utilize the time to focus on growth.Dua said that huge rally in broader markets always attracts many investors to equity markets.

The rise of retail investors over the past two years is a global phenomenon where retail investors, often referred to as Robinhood investors, have tried to ride the equity super rally wave in an effort to make quick money. Across the world, more and more tech-savvy youth have entered the markets, seeking to take control of their own finances.

Policy changes such as Know Your Customer (KYC) norms, greater internet penetration and affordable devices and technology enabled easier access to services and increased financialization of savings, analysts said.

HDFC Securities Head of Retail Research Deepak Jasani said individual investors put more money in equities than foreign and domestic institutions for the second year in a row. And the gap widened. Individual investors have apparently moved from dull small savings instruments to more exciting and rewarding equities (either directly or through mutual funds) in a big way.

“According to the Market Pulse Report of NSE India, the retail segment had a net investment in the cash market” 86,000 crore in 2021 till October. This is a jump of 68% over the whole of 2020. In comparison, foreign portfolio investors withdrew. 30,600 crore and domestic institutions pumped in less than 10,000 crore during this period,” he said.

However, the rapid valuation of Indian markets has led to several downgrades of domestic equities by foreign brokerages.

In October, Nomura moved Indian markets from overweight ratings to neutral due to higher valuations due to unfavorable risk-reward, as many positives appear to be in value, while headwinds are emerging. Instead, the Japanese brokerage firm prefers China and the ASEAN region and will look for better entry points to India.

Indian stock markets are also rapidly losing forex support. Foreign liquidity could be at risk as the US Federal Reserve prepares to reduce bond purchases faster than expected. Foreign institutional investors (FIIs) have been continuously dumping Indian stocks for the past few months, as they are worried about rapid valuations and the spread of the Omicron variant.

India has lost $4.7 billion of FII money in equities since October, indicating that strong liquidity inflows into the markets may not continue. Besides, Omicron is also threatening an equity rally amid continued recovery in India’s domestic economy. FIIs sold Indian shares worth $2.27 billion in October, $756 million in November and $1.69 billion in December.

“While the counterbalance to institutional participation by retail is welcome, we have not seen a sharp recovery in the markets following the influx of new retail investors over the past few quarters. If the market is correct and remains low for a long time. At times, some of these new retail investors may become frustrated and exit the markets, at least temporarily. Moreover, the limited bounce in the recently listed IPOs may also put some of them off for the upcoming IPOs,” Jasani said.

He added that the influx of new investors after the Covid pandemic has also helped to deepen the markets and diversify the sources of funding. For markets, this creates a huge load to offset the influence of institutional players—both foreign and local. Therefore, the dependence on foreign or local institutional flows will be reduced.

Interestingly, retail investors have shown much greater maturity over the years. Retail investors have used the corrective phase to invest in equities instead of panicking and exiting.

“Unlike in the past, we have seen many investors allocate some money to well-performing quality large-cap companies in the small-cap segment rather than focusing only on penny stocks,” Dua said.

Analysts expect the growth in demat accounts to continue this year. Factors such as digitisation, increasing awareness of equities, diversification of savings and a low interest rate environment will push more people to the capital market.

Small investors as well as investors from Tier-2 and 3 cities like Nashik, Jaipur, Guntur, Patna, Kannur, Tiruvallur and Nainital started stock market trading and smaller towns are expected to participate more.

“The Indian investment industry was growing at the rate of 10-15% per annum before the pandemic era. The industry then made a multiplier effect in the post-Covid-19 era and today is growing at 30-50% every year. In addition, India’s increased financial literacy, coupled with the pandemic, has led to a rapid rise in the investor community, especially among the younger population. On Grow, around 76% of investors are first time investors,” Jain said.