Retail activity in market falls to multi-year low

Poor returns and macroeconomic headwinds play spoilsport

Participation of retail investors in the stock market has slumped to a seven-year low, as poor returns in the last four to five years have sapped the appetite for equities.

Average daily turnover of retail and wealthy individual investors in the equity cash segment of the Bombay Stock Exchange (BSE) has fallen to Rs 3,414 crore, lowest since 2005, data compiled by BS Research Bureau showed. From its peak in 2007, retail turnover has more than halved.

And, things are not likely to improve soon, experts say.

“Where is the confidence? When you can earn 8-8.5 per cent tax-free returns from government bonds, why would you risk your capital in equities,” said Rahul Rege, head - retail business, Emkay Global Financial Services. “It’s very difficult to convince people to put money in stocks in this environment. I don’t see retail investors coming back to the market in a hurry.”

Returns from equities, considered a risky asset, have been dismal in the past four to five years. Since its peak of 20,873.33 reached on January 8, 2008, the Sensex has declined 21 per cent till date. The 30-stock index last closed at 16,328.25. In between, it slumped to a low of 8,160.4 on March 9, 2009 and rose to a new high of 21,004.96 on

November 5, 2010. However, retail investors could not benefit much from these movements.

“Participation from individual investors has dropped as they reckon they have not made money in past few months, if not years,” said Jignesh Shah, executive director at Sarasin-Alpen (India). “In the past five years, the Nifty has grown less than three per cent in terms of compounded annual growth rate. This return is lower than the inflation they face.”

Passive investment through mutual funds, too, have suffered. In the past four months, retail investors have pulled out Rs 3,733 crore from equity mutual fund schemes, Association of Mutual Funds in India data showed.

“The markets have remained stagnant and retail investors have gained nothing out of it,” said N Seturam, chief executive officer at Daiwa Mutual Fund. “Though markets are now cheap as valuations have declined, investors are not buying this story, as there are several macro headwinds. At a time when the rupee is falling and government’s deficit remains an issue, how can one expect growth?”

The outlook for stocks is cloudy as the euro zone debt crisis is back. Policy inaction, high inflation, widening current account deficit, fiscal deficit and slowing growth will continue to bother investors. In such a situation, confidence among retail investors is unlikely to improve in a hurry.