Stock prices could slide but don’t expect it to happen one fine day

In comparison, at the end of March 2020, that count was 31 million. This jumped to 40 million as of March 2021, 59.4 million as of March 2022, 72.7 million as of March 2023 and 91.6 million as of March 2024 before reaching 100 million. 

While not all unique registered investors are individuals, such a huge jump couldn’t have come without them. Also, India’s stock market now has more youngsters than before. As of March 2020, people under 30 made up around 23.5% of all registered investors. 

As of July, this stood at 39.9%, with the median age of investors falling from 38 to 32. Further, the number of unique mutual fund (MF) investors now stands at 40 million, a bulk of them individuals.

Also read: Primary market emerges as FIIs’ favourite amid high valuations in secondary market; ₹12,367 crore injected in August

Now, if one were to plot this increase in unique investors against the NSE 500 index, one would see a strong correlation: as the stock market has gone from strength to strength, it has attracted newer investors. 

As new investors have bought stocks, the stock market has risen further, and that has attracted even more new investors. Individual ownership of Indian stocks is now very close to that of foreign institutional investors (FIIs). 

As of June 2024, individual investors owned 9.6% of the NSE’s listed stocks. They also owned 7.8% indirectly through MFs. So, in total, they own 17.4% of NSE-listed stocks. In comparison, FIIs own 17.6%, a very small gap. The gap was 7.1% as of March 2021.

So, what does this tell us? How individual investors behave has become a crucial determinant of which way the stock market will go. From April to August, FIIs have invested just ₹8,367 crore in Indian stocks; nonetheless, the NSE 500 index has still gone up 15.6%. This is primarily because of individual investors pouring money in stocks.

Second, the number of registered investors has gone from 40 to 100 million in a span of a little under four-and-a-half years. Given this, about 60% of our investors have very little memory of anything that happened in the stock market before 2020. They have only seen the stock market go up and hence probably expect it to keep going up.

Third, that lack of any appreciation of the past has led to what the economist Robert Shiller calls “new-era thinking," a belief that a whole new phase is upon us and that this time is different, as a result of which “little attention is paid to ‘what-ifs,’ even if they have substantial probability" of happening. 

So, talking about not putting all your eggs in one basket as an investment strategy does not go down well in this new era. The new generation has not seen a stock market crash and therefore does not appreciate the importance of being prepared for one.

Also read: Nifty’s valuation not at alarming levels; positive on defence, manufacturing, consumption: Deepak Shenoy of Capitalmind

Fourth, new-era economic thinking has allowed many of those in the business of managing other people’s money (OPM) to link investing in Indian stocks with sentiments of nationalism, egging retail investors to buy more and more stocks even at excessive valuations.

Fifth, it has allowed promoters of firms to sell stakes and take some money off the table. A recent news report in The Economic Times pointed out that in 2024, promoters of over 250 companies have sold shares worth ₹97,000 crore. 

It has also let venture capital funded loss-making firms with terrible financials to sell shares at excessive valuations and get listed on the stock market, riding that wave of nationalism and new-era thinking.

Sixth, it has led many individual investors to pay insufficient attention to the earnings data of companies. During April to June, the net sales of more than 3,300 listed non-financial firms grew just 5.8% and their profits-after-tax shrank 4.2%. The stock market has completely ignored this.

Finally, it leaves us with the question of how this boom will end. Quite a few OPM wallahs have started talking about excessive valuations. Nonetheless, it’s worth remembering that the future, while explainable in hindsight, remains almost impossible to predict exactly.

Also, as Shiller writes: “Stock prices are essentially formed in the minds of the millions of investors who buy and sell stocks, and it is unlikely that so many people would simultaneously arrive at sudden and enduring changes in their long-run perceptions."

So, what does this mean? Shiller offers the example of the stock market crash of 1929. In the broad memory of people, it looked like something that happened just over a couple of days. But what people don’t remember is that the US stock market had recovered almost all its lost ground in early 1930. 

As he writes: “The significance of 1929 is not the one-day drops in October, but the fact that that year marked the beginning of the end: the beginning of the three year period that reversed much of the stock market gains of the 1920s. The same is true of other stock market drops."

Also read: Expert view: Challenges persist for the market; positive on these 12 banking, IT, consumer stocks, says SVP of Religare

Given this, whatever happens to Indian stocks, it is unlikely to happen one fine day, though that’s how people may remember it in the years to come.