Will golden period of retail inflows end? There are near-term worries
As trailing 12-month returns drop towards '0', the pace of inflows can reduce, says Jefferies
Strong inflows from domestic investors — through both mutual fund and direct investing routes — have helped cushion the market fall caused by a record sell-off by overseas investors. Small investors have continued to keep faith in equity investing, even as stocks have come off sharply from their highs.
In the past 12 months, an estimated ~4.5 trillion of retail money has entered the domestic equity market — making it a golden period for retail inflows. However, is the retail story nearing its end?
In a note, Jefferies has highlighted four factors that have historically influenced retail investor sentiment. The brokerage shift towards equity investment remains a long-term story but in the near term, the pace of retail inflows may reduce.
“A record $60-billion plus retail inflow (through MFS & direct) into domestic equity over the past 12 months has helped absorb heavy foreign selling. But retail inflows cannot be taken for granted, although the structural retail shift towards equities should help in the long term. As the trailing 12-month returns drop towards '0' in another 3-4 weeks, the pace of inflows can reduce. History shows that a sustained property market boom & higher market volatility also impact flows,” say Mahesh Nandurkar and Abhinav Sinha, strategist at Jefferies, in a note.
So what are the key factors influencing retail flows?
Trailing returns: “Our analysis of the past 10-year data of monthly flows versus trailing 12-month Nifty returns shows a few instances (late 2015, early 2016, large part of CY19) where market returns dropped to 0 per cent or lower caused inflows to reduce meaningfully,” says the Jefferies note.
The one-year return for the Nifty50 currently is about 5.6 per cent. The rolling 12-month returns are expected to soon turn negative as the base grows. The Nifty50 made a lifetime high of 18,477 on October 18. The index is currently down 13 per cent from its peak. It is currently around similar levels seen in August 2021.
Spike in volatility: “Market volatility, as measured by VIX, has a correlation with MF flows with periods of low volatility (2014, 2016-mid-2018, etc) seeing strong flows and high VIX periods, such as 2013 and 2020, seeing low flows,” the note says.
On a year-to-date (YTD) basis, the India VIX has jumped over 60 per cent. Yield on debt instruments: This also impacts retail flows into equities, says Jefferies. “Over the past decade, strong retail flows have coincided with declining/low deposit rates. However, for deposit rates to go above the 7 per cent level, it will take quite some time and should not be an immediate concern in our view.”
The yield on the 10-year government security is currently around 7.3 per cent. Meanwhile, there are certain corporates, such as Navi Finserv, looking to raise funds through the non-convertible debenture (NCD) route by offering a coupon of up to 9.8 per cent.
An upturn in real estate: This may also weigh on retail inflows into the stock markets. “Just like deposit rates, low property price inflation over the last decade have supported strong equity inflows. Property prices have started rising now and we believe that there is more room for property market upturn. Our channel checks suggest that the current surge in housing demand is end-user driven but a sustained upturn will likely pull in property 'investors' as well,” the Jefferies note says.