2nd wave: Retail investors may remain fence-sitters for now

Covid uncertainty is a big spoiler despite low returns across other asset classes

Retain investors may remain fence-sitters, at least for now, against the backdrop of the sharp rally in the equity markets in FY21 and the uncertain scenario amid the second Covid wave, according to analysts.

A key trigger for the increased retail participation in FY21, analysts said, was the lockdown triggered by Covid19 that saw investors channelise their savings to the capital markets in search of a better return on their investment and the need to increase their disposable income. Retail investors, experts said, usually fancy momentum-driven counters where the chances of making a good return in a short period 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 the 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.

The 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. The midand small-cap segments, usually considered the favourites of small/retail investors, outperformed their larger peer 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 their FY22 gross domestic product (GDP) forecast against 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, small- and mid-cap stocks may keep doing well vis-a-vis large-caps. On the other hand, as these segments are high beta, they may correct more if the overall markets fall,” Jasani says.

Silver lining

The silver lining for 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 number of registered investors (mostly retail) with the BSE, according to G Chokkalingam, founder and chief investment officer at Equinomics Research, stood at 64.4 million, up around 32 per cent YOY.

“In the March 2020 quarter (Q4FY21) alone, the BSE saw a net addition of 2 million investors (mostly retail) as people latched on to equities for better returns. This trend can pick up as small-savings rates 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, can drive retail participation in FY22, suggests Nikhil Kamath, co-founder and CIO 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 the financial markets currently, and we foresee this number growing exponentially to about 10 per cent over the next decade.”