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Markets may be headed for turbulent waters in 2022, but retail investor enthusiasm for stocks is expected to stay high.

The frenzy that started post March 2020 ballooned into a mania in 2021 when equities consistently outperformed traditional assets like gold and property, while savings instruments such as fixed deposits and bonds yielded lower returns.

Analysts are confident that even as liquidity tapering by global central banks in 2022 could puncture the super rally in markets, India’s retail investors will continue to emerge as a dominant factor in equities.

According to Gaurav Dua, head - capital market strategy, Sharekhan by BNP Paribas, normalization of monetary policy by withdrawal of excess liquidity by central bankers is expected to create some volatility in the short term.

He feels that the phase of easy money is over now but India is on the cusp of a multi-year upcycle with healthy growth in corporate profits.

“Thus, the equity market is expected to do well for the next few years. A lot many retail investors understand the opportunity and would continue to stay invested in equity markets," Dua added.

Indian markets have gained massively in the past two years. Benchmark indices Sensex and Nifty have gained over 20% in 2021 alone, after hitting multiple record highs. In contrast, gold prices have fallen 3% in this year.

Harsh Jain, co-founder and COO, Groww (an online investment platform), feels the rise of retail investment isn’t limited to stock investing on exchanges (but via mutual funds as well) and will continue to sustain in 2022.

New demat accounts were created at a super rate in 2021. A record 27.44 million new demat accounts were created from January to November in this year. NSDL and CSDL data showed 3.24 million and 3.63 million new accounts were created in October and November, respectively. In contrast, 10.50 million demat accounts were made in 2020, the year when retail investor participation in equity markets began to swell.

As of November, India’s total demat accounts stood at 77.24 million, compared to 49.80 million at the end of 2020 and 39.30 million in 2019. A demat account is opened by an investor with a depository participant to invest in securities such as stocks and bonds. The securities are held in a digital format.

There were a record number of demat accounts as an increasing number of millennials started moving towards dual or multiple income sources, and the stock market seemed to be a great investment option.

Dua feels that increasing participation by retail investors is driven by limited opportunities to earn inflation-beating returns in the low interest rate regime. “The proliferation of easy-to-use trading tech platforms offering low-cost services has also added to the attractiveness of equities as an asset class. Lastly, the lockdown and work from home has given the flexibility to retail investors to utilize time to focus on boosting yield from their investable funds. The massive rally in the broader markets always tends to attract many investors to equity markets," said Dua.

The rise of retail investors in the past two years is a global phenomenon where retail investors, often referred to as Robinhood investors, have tried to ride the equity super rally wave in an attempt to make a quick buck. Across the globe, more and more tech-savvy youngsters have entered the markets, wanting to take control of their own finances.

Policy changes like easier know-your-customer (KYC) norms, greater internet penetration and affordable devices and technology enabled easy access to services and increased the financialization of savings, analysts said.

Deepak Jasani, head of retail research, HDFC Securities, said that individual investors piled more money into equities than foreign and domestic institutions combined for the second straight year. And the gap widened. Individual investors have clearly moved away from dull small savings instruments towards the more exciting and rewarding equities (directly or through mutual funds) in a big way.

“As per NSE India’s Market Pulse report, net investment by the retail segment in the cash market stood at 86,000 crore as of October in 2021. That’s a 68% jump over the entire 2020. In comparison, foreign portfolio investors withdrew 30,600 crore and domestic institutions pumped in less than 10,000 crore during the period," he added.

However, steep valuations of Indian markets have led to a slew of downgrades of domestic equities by foreign brokerages.

In October, Nomura downgraded Indian markets to neutral from overweight rating due to unfavourable risk-reward given high valuations, as a number of positives appear to be priced in, while headwinds are emerging. Instead, the Japanese brokerage firm prefers China and Asean region and will be looking for better entry points for India.

Indian equities are also fast losing foreign money support. Foreign liquidity could be under threat as the US Federal Reserve gears up to taper bond purchases faster than anticipated. Foreign institutional investors (FIIs) have been consistently dumping Indian shares for the past few months amid concerns over steep valuations and the spread of the Omicron variant.

India has lost $4.7 billion of FII money in equities since October, indicating that markets may not continue to see robust liquidity flows. In addition, Omicron is also threatening the equities rally amid a sustained recovery of India’s domestic economy. FIIs sold Indian equities worth $2.27 billion in October, $756 million in November and $1.69 billion in December.

“Though the counterbalance to the institutional participation by retail is welcome, we have not seen markets correct sharply in the past few quarters post the flood of new retail investors coming in. In case the markets correct and remain at lower levels for a long period of time, some of these new retail investors could get frustrated and opt out of the markets, at least temporarily. Also the limited bump up on listing in the recently listed IPOs could also put off some of them as far as the forthcoming IPOs are concerned,"Jasani said.

He added that the flood of new investors post covid pandemic has also helped deepen the markets and diversify the sources of funds. For the markets, it creates a large weight to offset the impact of institutional players—both foreign and local. Hence, the dependence on foreign or local institutional flows will reduce.

Interestingly, retail investors have shown a lot more maturity in the past few years. Retail investors have used the corrective phase to invest money in equities rather than panic and exit.

“Unlike the past, we have seen many investors allocate some money to well-performing quality large-cap companies rather than focus solely on penny stocks in the small-cap segment," Dua added.

Analysts expect demat accounts to continue growing this year. Factors such as digitization, growing awareness about equities, diversification of saving and the low-interest rate environment will push more people towards the capital markets.

Younger investors as well as investors from tier-2 and 3 cities such as Nashik, Jaipur, Guntur, Patna, Kannur, Tiruvallur and Nainital started stock market trading and smaller cities are expected to participate more.

“The Indian investment industry before the pandemic era was growing at a rate of 10-15% per year. The industry then underwent a multiplier effect post the covid-19 era and is today growing at a rate of 30-50% every year. Furthermore, India’s increased financial literacy, coupled with the pandemic, has led to a steep rise in the investor community, especially among the younger population. On Groww, nearly 76% of the investors are first-time investors," said Jain.

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