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A distinguishing feature of the ongoing bull market is the enthusiastic participation of retail investors. The availability of modern tech platforms that enable trading from anywhere and the abysmally low cost of trading have attracted a large number of retail investors to the market. Also, work from home (WFH) and the consequent gain in travel time has given the modern tech-savvy retail investors access to markets and time to trade. Poor return from fixed income such as bank deposits has also played a major role in pushing many investors to the stock market.

Force to reckon with

The emergence of retail investors as a powerful bloc in stock markets – the so-called Robinhood phenomenon – is a global trend. It is more pronounced in India. In FY21, a record 14.2 million new demat accounts were opened. This trend continues with an additional 44.7 lakh new demat accounts being opened in the first 2 months of this FY. According to Prime Database, retail investors now account for around 45 per cent of cash market transactions on the Indian stock exchanges – a sharp rise from 33 per cent in 2016. During this period, the share of FIIs fell from 23 per cent to 11 per cent and that of DIIs from 9 per cent to 7 per cent. Clearly, ‘new money’ is trumping ‘smart money’ at least now.

This category of newbie investors has some common characteristics. They have never experienced a bear market. They don’t know much about fundamentals like valuations and macroeconomics, which have a huge bearing on markets in the long run. But, lured by the impressive returns from the market, they have been trading merrily. And, more importantly, they have benefitted from the almost one-way rally in the market since the crash of March 2020.

‘Smart money’ vs ‘New money’

Institutions, which represent ‘smart money’, have been skeptical about the rally. FIIs have been big sellers in the market in July, having sold equity worth Rs 11,308 crore. At around 15,600 Nifty, India’s market cap to GDP ratio moved towards 110 per cent against the long-term average of around 77 per cent. The one-year forward PE has crossed 21 against the long-term average of around 16. These are clear indications of rich valuations. This might have prompted the FIIs to sell. But retail investors who have been buying all dips promptly absorbed all FII selling, pushing the markets further up. And when the Nifty range of 15,600-15,900 was decisively broken on the upside, it was clear that the market would move to the next higher level, which it did. This has forced FIIs to come back to the market on fears of losing the momentum. Is the ‘smart money’ being led by the ‘new money’?

Who will have the last laugh?

It is well known that accommodative monetary policy of the leading central banks of the world, particularly the Fed, is a major driver of this global equity rally. It is also known that when the accommodative monetary policy is withdrawn, it will lead to major corrections in the stock market. Going by the current indications, the Fed is likely to start ‘tapering’ by end 2021 or early 2022 and may indicate policy normalization. Rate hikes are expected only in 2023. But bond yields will start hardening in 2022 itself and money will flow from equity to bonds. This can trigger sharp market corrections. But the bullish view is that ‘tapering’ and the eventual normalization will be well communicated by the Fed to avoid a repeat of the 2013 ‘taper tantrum’.

Retail dominates trade, but holdings are with FIIs

It is possible that if the nascent global growth sustains and accelerates in 2022, earnings will catch up to justify lofty valuations. Even then, a sharp market correction is possible when the Fed begins normalization and bond yields rise. FIIs who are sitting on massive profits may turn into big sellers. Even though retail dominates trade now, holdings are with FIIs. FIIs own 27.4 per cent of Indian equity while domestic institutions own 7.9 per cent and retail own around 8.1 per cent. The billion-dollar question is: can the retail investors and DIIs absorb this potential flood of selling by FIIs particularly when valuations are stretched? Will the smart money overwhelm the new money? We will have to wait and watch.


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