 "Volatility dampens retail interest")
Is 2016 the new 2008? A question on the minds of most retail (small) investors, spooked by the recent market volatility.
While high net worth investors (HNIs, meaning wealthy ones) who have been sitting on the sidelines have been looking at the recent correction as a buying opportunity, retail investors are either staying away altogether or not making fresh purchases. According to experts, retail cash volumes in 2015 declined on average by 20 per cent over the previous year.
“Given the kind of volatility we have seen in the past few months, there is increasing pessimism among retail investors about where the markets are headed,” said Rahul Rege, retail head, Emkay Global Financial Services. “Some are even wondering if a 2008-like situation will play out again.”
According to Prasanth Prabhakaran, head, retail broking, IIFL, retail investors are bulls by nature. Their participation comes down drastically when the market tanks or is range-bound. “Investors that entered at high levels in 2014 or early 2015 are stuck and not bringing in fresh capital,” he said.
Traditionally, retail investors put 70-80 per cent of their money in mid-cap stocks, said experts. According to a recent Morgan Stanley report, of the three calendar years with negative equity returns in the past decade, 2015 is the only one where mid-caps had outperformed large-caps in a falling market. "Conventional wisdom suggests that in years of negative return, mid-caps underperform large-cap stocks, owing to higher pressure on earnings and lower liquidity in the markets," said the research note.
The increase in the minimum lot size in the derivatives segment from Rs 2 lakh to Rs 5 lakh from November 1 has also led some investors to put money into mid-caps and small-caps.
Mid-cap and small-cap investors might, however, be treading on dangerous territory. For, the price to earnings (PE) multiple of these indices are quoting at much higher than the large-cap benchmark indices, Sensex and Nifty. The PE multiple of the NSE Midcap 100 index, for instance, is currently 23 per cent more than that of the Nifty. To put this context, in the year 2014, when the market rally took off, the Nifty traded at a 25 per cent premium to the mid-cap index.
“While the mid-caps have had a good run in the past two years, those who invested in bubble stocks have lost money,” said G Chokkalingam, founder, Equinomics Research & Advisory. “The overall trend has been disturbing, as even good large-caps with reasonably good valuations have taken a beating.”
The good news is that most of the retail money in 2015 came in through the mutual fund route, not direct equity. The assets under management of equity MFs rose to Rs 3.6 lakh crore in December 2015 from Rs 2.8 lakh crore a year before.
“Most of the money has been coming into mid-cap and small-cap funds as they have been the outperformers for most of last year,” said Dhirendra Kumar, chief executive, Value Research, an MF tracker.
For a one-year period, large-cap funds have given average category returns of minus 6.6 per cent, according to Vakue research data. In contrast, the mid-cap and small-cap categories have returned 1.6 per cent and 3.8 per cent, respectively.
The Sensex rose 6.7 per cent between January and March last year and steadily fell thereafter, with a year-to-date loss of 5.6 per cent. A deficient monsoon, shaky global markets, subdued corporate earnings and a slowing Chinese economy were key reasons.
