The fact that retail investors are selling low and buying near highs is again proving to be true. Analysis of the BSE 500 corporate shareholding model reveals that between the market trough of March 2020 and the highs of March 2021, it was the little guy who became a bull where others like developers, foreign institutions, insurers and mutual funds are slowly calling it a day.
This, unfortunately, makes retail investors perfect targets for a bear ambush – a wholly unexpected event now after an extended period of above-average stock returns.
According to data from Capitaline, retail investors (those with nominal share capital of up to 1 lakh) increased their stakes in 102 companies in which the promoters reduced theirs. Likewise, in 175 companies where foreign institutional investors (FIIs) reduced their participation, retail investors increased their holdings.
This trend is manifested in actions where national institutions have also reduced their holdings. In as many as 185 stocks where mutual funds have reduced their holdings and in the 80 stocks where insurance companies have reduced their stakes, retail investors have increased their hold.
Together, for the 310 companies in which retail investors increased their stake, 281 companies saw small investor participation increase by up to 5%, while 29 companies saw their retail stake increase by more than 5%.
As stocks have continued their northward journey from the March 2020 Covid lows, FOMO (fear of missing out) has likely made retail investors go up to their necks.
Small Mid-Cap Game
Historically, retail investors have been more enthusiastic about small businesses. Also in the ongoing bull run, 77% (239 out of 310) of the stocks in which retail investors have increased their stake come from the mid- and small-cap space. On the other hand, they increased their stakes in only 71 companies belonging to the large cap category. With markets rising sharply, experts advise caution.
âInvesting in small and medium-sized businesses without considering fundamentals could be risky for retail investors,â says VK Vijayakumar, chief investment strategist, Geojit Financial Services. âThe market is currently overvalued by conventional valuation metrics such as the PE ratio, price versus book, and market capitalization versus GDP. There is moss in some mid and small caps and stocks in these categories will usually be shot in a bear ambush, which can happen at any time, âhe adds.
The S&P BSE 400 MidSmallCap Index was already down from its 2018 high when Covid-19 hit. So grabbing early on in mid and small caps would have been prudent. However, retail investors often wait for indexes from larger investors before entering. This trend allows discerning market players to offload a stock that has almost peaked, while the retail segment is joining the party late.
In the top 10 stocks where retail investors increased their bets, with the exception of one (Future Retail), the other nine counters saw a massive increase in stock prices, with many gains potentially occurring in the first part of the rally. Himadri Specialty, whose retail stake rose 19.3%, has gained 86% from the March 23, 2020 low. Alkyl Amines posted a whopping 646 percent share price gain in the stock market. during this period, as did Laurus Labs (up 848 percent).
However, it should be noted that of the 310 stocks where retail investors increased their stake, the average share price gain is 33% versus 35% for the 190 odd stocks where retail buyers did not increase their exposure. .