The retail connect

Stock market has benefitted from retail participation

The total number of demat accounts crossed 100 million in August 2022, up from around 40 million accounts in March 2020. This breakneck growth indicates changes in the attitude to financial assets within the average Indian household. The 100-million tally amounts to 60-70 million unique investors since many hold multiple accounts. While the bulk of household financial assets continue to be held in fixed deposits and insurance-related assets (much of which is also invested in the stock market), more savings are flowing into equity, either through direct investments, or via mutual funds. The pandemic led to what Americans are calling the “Robinhood effect”. Stuck at home during lockdowns, millions of investors started dabbling in equity, in derivatives, and in more exotic instruments like cryptocurrencies. Many of them used discount brokerages like Zerodha, the desi equivalent of Robinhood. Given the concerted effort by large central banks to ensure easy monetary conditions, stocks looked like a better bet than debt instruments. The National Securities Depository Ltd and the Central Depository Services Ltd, which manage those 100 million demat accounts, hold assets worth Rs 360 trillion under custody between them with roughly 45 per cent growth over the last two fiscals.

Retail investors hold 52 per cent of the market share in average daily turnover in stocks, while foreign portfolio investors (FPIs) and domestic institutional investors contribute 19 per cent and 29 per cent, respectively. Retail investors are also very active in the derivatives segment. Thanks to a combination of institutional and retail support, global markets moved up between May 2020 and late 2021. India was among the best performers with Nifty hitting an all-time high in October 2021. Around that time, the Fed decided to start tightening and subsequently other central banks followed suit. This led to institutional caution. The FPIs pulled $33 billion equivalent out of Indian stocks between January and June 2022, but they returned as net buyers in July and August. Retail investors ignored the correction and continued investing, which provided a cushion against the FPI selling. India’s equity indices have held up quite well, with the six-month correction followed by a rebound. The Nifty is ahead by 1.5 per cent in calendar year 2022 whereas the US S&P500 is down 18 per cent.

It is quite likely that the market will see deeper corrections in the near future. Global growth is slowing while inflation rules high and supply chains are still disrupted. India’s 2022-23 growth estimates have been cut significantly after the first quarter estimates were released. In the battle against inflation, the Reserve Bank of India has raised policy rates three times since May and it may increase again, given that the Fed is committed to further hikes and so is the European Central Bank. Slower growth means lower corporate earnings and higher interest rates mean a “risk-off” attitude. Many retail investors are also returning to normal work schedules and some of them will cut their equity exposure in the event of a correction. Household exposure in equity is low in absolute terms and high growth needs to be fuelled by risk-capital. If retail investors can hold on to their portfolios through the long term, they will receive the rewards of compounding. However, they do need to be cautious in a scenario where interest rates are rising and valuations are high.