Demat addition, trading turnover point to robust investor sentiment

Activity underpinned by buoyancy in underlying secondary as well as the primary markets

Investor sentiment in the $4.6-trillion domestic equity markets continues to be buoyant, marked by surging new accounts and trading volumes. The average daily turnover (ADTV) and fresh dematerialised (demat) adds hit record highs. The broking industry added 4.7 million new accounts in January, surpassing the previous record of 4.1 million in the preceding month. Similarly, the ADTV for both the cash and derivatives segment (NSE and BSE combined) hit a record of Rs 1.23 trillion and Rs 460 trillion (on notional basis).

The surge in activity is underpinned by buoyancy in the underlying secondary as well as the primary markets. The key indices hit record highs in January and over two dozen initial public offerings (IPOs) hit the market on the main exchange and the SME platforms.

"There is considerable momentum in the market on the back of the rally that happened pre-budget and hopes of regime continuity. The volumes will continue to remain robust. More importantly, mid- and small-caps are rallying, which is reflected in the cash volumes. Unless there is some big correction, there is no reason for cash columns to taper," said Ajay Menon, chief executive officer (CEO) for broking and distribution of Motilal Oswal Financial Services.

The upswing in trading activity was despite sharp drawdowns from overseas funds. In January, foreign portfolio investors (FPIs) pulled out over $3 billion from the cash segment — most in 12 months. The benchmark Sensex and the Nifty ended marginally lower in January but the Nifty Midcap 100 and the Nifty Smallcap 100 indices rose 5.2 per cent and 5.8 per cent, respectively.

"There is a lot of participation in the markets from domestic buyers. They are able to offset the FPI selling. Post-covid, several investors have made money, which is helping sustain the positive momentum," said UR Bhat, co-founder, Alphaniti Fintech.

Industry players said increasingly many investors are opting to invest directly vis-à-vis the safer mutual fund route with the hopes that the markets will continue their upward trajectory.

"There is a shift from saving to investing whether it is mutual funds or stocks. Investors are pretty optimistic about the markets. The expectation is that regime continuity and economic growth will drive more activity in the markets and thereby higher volumes," said Jaideep Hansraj, managing director of Kotak Securities.

However, the spurt in activity comes at a time when there are concerns around exorbitant valuations in the small-cap space.

“There is a disproportionate activity in the mid-cap, small-cap and PSU stocks that are driving the churn and the volumes. Many traders are taking positions and quickly booking profits, which is leading to a lot of churn," said Dhiraj Relli, CEO of HDFC Securities.

The Nifty Midcap 100 and the Nifty Smallcap 100 have gained 60 per cent and 74 per cent in the past one year, respectively. By comparison, the benchmark Nifty 50 index is up 23 per cent.