As the retail party in the stock market is going strong, the parallels are being drawn from the global financial crisis of 2007-08. Although high retail participation in a rising market scenario is a classic trend, one thing that differs this time is participation by a good number of serious market investors. Many retail investors appear to be prepared for a long haul, not for quick bucks.
Data available from Central Depository Services Limited (CDSL) shows that as many as 26 lakh demat accounts were opened between March and June. By comparison, 8.4 lakh accounts were opened in the first two months of 2020. The trend was similar post global financial crisis when 7.4 lakh accounts were opened in January 2008 compared to just 2.3 lakh accounts in the previous month (December 2007). Although statistical and anecdotal evidence suggest similarities in retail participation trend between 2007-08 and now, the retail party is much different or rather sober this time.
"In 2007-08, most investors were adding small-cap and penny stocks to their portfolios. The market had excessive leverage, and the valuations were not able to justify stock prices. The liquidity in the market was also on the higher side. Most brokerage houses and NBFCs were funding small-cap and penny stocks, easy leverages were available leading to a bubble. This time things are different as the customers are more informed and focussed on quality stocks. Our insight study reveals that customers are buying top 30 index stocks. While market commentary suggests that retail investors are repeating the errors of 2008, in our view, this is not the case," says B Gopkumar, MD & CEO, Axis Securities.
Vinod Nair, Head of Research at at Geojit Financial Services concurs. "During 2007-08, retail investors were heavily impacted by high amount of exposure in mid, small & micro caps while the period of consolidation in the world equity market was very high due to the global financial crisis, leading to fall in personal income and stock prices. During the years, it is very inspiring to know a positive change in the investment pattern of retail investors with better understanding of their own risk averseness along with basic knowhow regarding investment essentials and platforms. We can easily presume that the majority of retail investors were not impacted much this time due to higher exposure in quality stocks, MFs and low degree of leverage," he says.
Taking stock of rising retail participation
The NSE had added 20 lakh active clients across all brokerages in FY20. By comparison, in just three months in FY21, it has already added 14 lakh active clients. Besides, as per Edelweiss Securities, in July so far, retail participation is more than 70 per cent in the cash market versus 27 per cent institutional participation.
But, the money that is coming is to build a long-term portfolio. Latest shareholding data available with AceEquity shows that retail investors have increased stake in 356 of BSE-500 companies in the June quarter compared to the March quarter. Among top 50 Nifty companies, they have hiked stakes in 39 of them. The top ones include State Bank Of India, Indian Oil Corporation, Tata Motors, ITC, Hindustan Unilever and Bharti Airtel.
Uptick in delivery volumes
The delivery volumes at brokerages have seen an upside that suggests most investors are buying stocks to hold it, not buying and selling. Gopkumar of Axis Securities says that they have seen a substantial improvement in delivery volumes. "The new-to-market investors are not 'Robinhood' traders, as is being debated by many forums. Pre-COVID cash market volumes for the industry were around Rs 22,000 crore, which are now averaging around Rs 39,000 crore. On the F&O side, the industry volumes were about Rs 700,000 crore pre-COVID, which has now touched about Rs 900,000 crore. We have also observed that our customers are biased towards 'BUY,' and we expect this trend to continue going forward."
Similarly, Upstox has seen a growth of around 3X in delivery orders coming from new-to-market investors between April and June 2020, as compared to the last quarter.
So far as trading in stocks in concerned, Ravi Kumar, co-founder and CEO, Upstox says that while millennial customers being digital natives can make well-informed decisions, they should stick to certain ground rules. "These include starting with paper trading, fine-tuning stock investing strategy before committing money, and using the stop-loss option to maintain financial discipline while always staying informed."
While some investors may have come with the objective of making quick money through trading in the rising market momentum, the number of serious investors this time with medium to long term horizon is significant, which signals the maturity of retail equity investors in India.