Retail investors may remain fence-sitters amid market uncertainty

The sharp rally in equity markets in fiscal 2020-21 (FY21) – and since their March 2020 low – coupled with the uncertainty that lies ahead in the backdrop of second Covid wave and its impact on the economy, is likely see retail investors remain fence-sitters, at least for now, say analysts.

A key trigger for the increased retail participation in FY21, analysts say, was the lockdown triggered by Covid-19 that saw investors channelize their savings to capital markets in search of better return on their investments and the need to increase their disposable income. Retail investors, experts say, usually fancy momentum-driven counters where the chances of making good return in a short period of time remain high.

 

“In March 2020, retail investors got a good entry point and have generally made money. With other investment avenues not looking too exciting, a lot of their money was diverted to equities. Some even withdrew from mutual funds (MFs) to dabble directly into equities. All this led to markets doing well. Any sector/stock that is showing turnaround / positive development comes under the scanner of retail investors. However, cyclical stocks generally appeal more to them as their valuation are not very high / astronomical,” explains Deepak Jasani, head of retail research at HDFC Securities.

Meanwhile, Indian equity markets recorded their best performance in a financial year in FY21 with the S&P BSE Sensex and the Nifty50 rallying 68 per cent and 71 per cent, respectively during this period. Gain in the mid-and small-cap segments, usually considered the favourites of small / retail investors, outperformed their larger peers and surged 91 per cent and 115 per cent, respectively on the BSE.

But the nervousness related to the second wave of the pandemic is beginning to show now. Most economists across research and broking houses and rating agencies have cut the FY22 gross domestic product (GDP) forecast in the backdrop of sporadic lockdowns and mobility curbs across key Indian cities. The markets, too, have reacted with the S&P BSE Sensex slipping around 9 per cent from its 52-week high hit in February 2021.

“Retail investors typically want high alpha, and hence look more at mid-and small-caps, which is why these two market segments have done well over the past few quarters. In case the retail interest sustains in FY22, the small-and midcap stocks may keep doing well vis-a-vis the large-caps. On the other hand, as these segments are high beta, they may correct more in case the overall markets falls,” Jasani adds.

Silver lining

The silver lining for an increased retail participation in equities in FY22, according to experts, are the low returns across other asset classes, which may still draw investors to the markets. As on March 31, the registered investors (mostly retail) with BSE, according to G Chokkalingam, founder and chief investment officer at Equinomics Research stood at 6.44 crore – up around 32 per cent year-on-year (YoY).

“In the March 2020 quarter (Q4FY21) alone, BSE saw a net addition of 20 lakh investors (mostly retail) as people latched on to equities for better return. This trend can pick up as small-savings rate offer limited returns,” he said.

A falling rate of yield in real estate and fixed income, along with stark under-penetration when it comes to financial inclusion in India could drive retail participation in FY22, suggests Nikhil Kamath, co-founder and chief investment officer at True Beacon and Zerodha. 

“The primordial factor is having a sustained bull run; if stock prices continue to rise, so will retail participation. Only around 1.5 per cent Indians have access to financial markets currently, and we foresee this number growing exponentially to about 10 per cent over the next decade,” he says.