One of the most favoured investing spaces of millions of Indian retail investors has entered a technical bear market and vaporised more than five years of gains as selling in the domestic market intensified.
The Nifty Smallcap 100 index has fallen more than 27 percent from its record high of 12,047.5 points hit last October after sliding more than four percent on May 11 reflecting rising pain for retail investors.
The index has also seen its five-year rolling returns turn flat suggesting that investors who participated in the previous bull run in 2017 have seen returns evaporate at a fast pace. That said, the index has still given 40 percent returns in the last three years.
Retail investors, traditionally, prefer investing in smallcap stocks as they expect larger gains on a lower base.
Since March 2020, retail investors raised their stake in 158 of 218 smallcap stocks for which shareholding data was available on AceEquity.
Intensifying selling in smallcap indices comes as retail investors drag their feet given the surge in global volatility and sharp decline in individual stocks.
Moneycontrol on 2 May 2022 reported that net inflows from retail investors hit more than a six month low in March at Rs 7,100 crore. The share of retail investors in the cash market’s average daily volume also dipped to 36.4 percent in March from 37.5 percent in February. In March 2021, the share of retail investors in the cash segment was as high as 45 percent.
Market participants said that reopening the economy has increased spending avenues for retail investors after two years, while deep losses in some new-age tech stocks over the past year have also dented sentiment.
That said, the interest of such investors in the initial public offering of Life Insurance Corporation that concluded on May 9 suggested that the appetite has shrunk but not extinguished. Retail investors bid for shares worth more than Rs 12,000 crore in the LIC IPO, the highest bids received by an IPO in recent years.
Market participants see the crack in smallcap stocks as a sign of wider concerns over earnings growth at a time when rising inflation is not only eating into consumers’ spending power but profitability of companies as well.
Brokerage firm Motilal Oswal Financial Services said that the earnings per share of Nifty 50 for 2022-23 and 2023-24 has only seen a marginal upgrade during the March quarter earnings season. With earnings upgrades drying up, investors are booking profits out of fear of losing out on their gains of the past two years, said analysts.
Multiple companies have raised concerns that profitability will remain under pressure in the coming quarters as higher input costs weigh on profits. At the same time, the emergency interest rate hike by the Reserve Bank of India (RBI) earlier this month also indicated that inflation was starting to impinge on economic growth.“There is the collateral risk that if inflation remains elevated at these levels for too long, it can de-anchor inflation expectations which, in turn, can become self-fulfilling and detrimental to growth and financial stability,” RBI governor Shaktikanta Das had said while delivering the rate hike.