Small investors may bear brunt of crash

According to National Stock Exchange (NSE) data, retail investors who directly buy and sell shares on its secondary market made net purchases for a second straight month in September, amounting to ₹7,500 crore. These purchases came on top of the ₹14,400 crore they invested in the previous month, resulting in a cumulative investment of ₹21,900 crore over these two months. This came after net sales of ₹21,400 crore from April to July.

Market experts warned that those entering the rally at the peak, driven by a fear of missing out (FOMO) and seeking quick gains, will likely bear the brunt of a deeper cut in case of a more substantial market downturn.

“If you’ve entered only for near-term gains, you’re in for rough weather,” said Gaurav Dua, head of capital market strategy at Sharekhan by BNP Paribas. “However, if you’re in for the long haul, say with a time horizon of two years, then you shouldn’t worry about this correction as the economic growth engine will be led by fundamentally sound mid- and small-cap firms.”

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The present leg of the Nifty Midcap 150 and Nifty Smallcap 250 rally from their 20 March lows saw the two indices gaining twice as much as the Nifty’s 20% rally to a record high of 20,222.45 in mid-September from a low of 16,828 on 20 March. While the Midcap gauge rose by 40% to a record high of 15,599.05 by 12 September, the Smallcap index gained 44% to its all-time high of 12,590.45 on 18 October.

However, by the time direct retail investors entered the market, the Nifty Midcap 150 had risen by 27% from its 20 March lows, while the Nifty Smallcap 250 was up 30% already. This shows they entered when the broader markets had run up substantially. As of 23 October, the Nifty Midcap 150 was down 6.8% from its record high, while the Nifty Smallcap 250 had shed 5.24% from its all-time high this month.

“At the stock level, the recent fall in mid and small caps is far worse than at the index level,” said Rajesh Palviya, senior vice president (research) at Axis Securities. “Retail investors who had FOMO and entered late in the rally will bear the brunt of an exacerbated correction in markets.”

Direct retail buying of ₹21,900 crore on NSE’s secondary market in August-September contrasts with FPI selling of ₹27,800 crore in cash during the same period, data shows.

Against direct retail, individual investors who invested in mid- and small-cap schemes of mutual funds are better off as they have been investing regularly each month through systematic investment plans that help in cost averaging—they tend to buy more units at low prices and fewer units at high price, bringing down the overall acquisition cost.

Despite the recent market losses, some market analysts remain optimistic, given the strong earnings growth of corporate India. They say a correction of around 10% is healthy in a structural bull market.

“One should understand that in a structural bull market, 8-10% correction in the interim is a normal phenomenon,” said Vijay Chandok, managing director and chief executive of ICICI Securities. “While the US growth slowdown is indeed a concern, albeit a known one, the current Israel-Palestine tussle, unlike the Russia/Ukraine conflict, is smaller in scale both in terms of geographical/countries participation as well as global trade impact. Thus, the overall impact is likely to be limited and short-lived for commodity as well as equity market.”

According to Chandok, positive catalysts such as robust corporate earnings (likely to grow at 16.5% CAGR over FY23-25) and favourable growth-inflation dynamics of India (~6-7% sustainable growth with comfortable inflation of ~5%) make India an outlier as an equity investment destination in the medium to long term amid dwindling global growth milieu.

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Updated: 24 Oct 2023, 09:58 PM IST