Can retail investors sustain the market rally?

Excellent study material for all civil services aspirants - begin learning - Kar ke dikhayenge!

Can retail investors sustain the market rally?

---

Read more on - Polity | Economy | Schemes | S&T | Environment

---

• Since 2000: The FPIs were the main boosters for Indian stock markets since 2000, and pumped huge sums without fail. Since 2014, mutual funds (MFs) put in a lot of money, and kept the markets alive. Since April 2021, both these have run dry!
• What went wrong: In FY 2021-22, most FPIs pulled money out of Indian markets, and invested in markets where countries controlled pandemic much better (hence quicker recovery). India's own equity-MFs saw sustained outflows since Feb 2021, and could not bridge the gap left by FPIs. But despite these two institutional investors being slow, the Nifty 50 didn't fall. 
• So who's buying: The individual retail investors didn't desert the market, and became the third pillar of support. But these aren't technically savvy people, and with much lower capital. So unless the pandemic is truly contained quickly, and FPIs and MFs return, markets may crack.
• New investors in market: The year 2020 saw a bunch of new investors enter Indian markets, due to lockdown and free time, coupled with app-based investing. More than 1 crore new accounts were added by NSDL and CDSL in 2020 alone.

1. For most, stock markets are a source of fun, while stuck at home; so short-term trading is rampant, as seen via retail shareholding in listed stocks and daily share in turnover
2. Check total market-cap based ownership pattern of NSE listed firms - private promoters held 44%, FPIs held 22% and retail investors 9% (Dec 2020)
3. Retails holdings are made of HNI holdings and pure retail holders (less than Rs.1 lakh) - HNIs are at 2% from 2019 to 2020, and retail ones went from 6% to 7%

• Which stocks: Retail investors have been chasing weak stocks, like Indiabulls Housing Finance, Future Retail etc. Eight of the top 10 where retail investors invested, saw an erosion in market capitalisation in 2020.

1. Retail investors are trading in both the cash and derivative segments
2. In cash market, their share went from 39% in FY20 to 45% in FY21
3. It's wrong, hence, to assume that retail investors can provide the push to pump prices higher. Why not? Because most new investors are simply using trading margins that allow exposure several times their capital. (so when prices fall, such positions have to be unwound to meet margin calls, worsening the price fall)

• Actual economy today: It's clear that the second Covid wave has put India in a slippery position now, compared to other economies. Regional lockdowns will continue, as will thousands of daily deaths, for some time. Corporate earnings in Q1 will be hit badly. But the UK, US and other Western countries are sharply recovering. So FPIs would stay there, not here.
• What about domestic situation: Consumption engine of India would stay slowed, due to health concerns. Rising commodity prices and inflation are hitting margins. The valuations of stocks are still at their highest, even higher than the frothy 2007 era. The rally may crack!
• Bull market: In a genuine bull market, the informed investors enter the first phase when smaller investors are selling, and then comes the second phase (broad-based) with smaller investors returning. In the final, third phase, informed ones sell out, while retail investors keep buying. Indian stock markets may have reached the third phase now.
• Summary: The only way the rally will go on, once second wave abates, is if FPIs and MFs return. Else, it's time to spread investments across avenues.

Read more on - Polity | Economy | Schemes | S&T | Environment

Join UPSC Self Prep course | Online Course (PT Gurukul)  | Covid Special Course | Join PT courses

* Content sourced from free internet sources (publications, PIB site, international sites, etc.). Take your own subscriptions. Copyrights acknowledged.