What the wise man does in the beginning, the fool does in the end!
The saying above by Warren Buffet has proven to be true for retail investors, especially during bouts of large market corrections. One of the primary reasons for this is market psychology where the initial phases of the market rise are met with scepticism and only towards the fag end did we see euphoria creep in sucking in retail investors in droves. The same has been true in 2001/2008 and possibly even early 2020 with the high influx of retail investors preceding large market corrections.
However, the million-dollar question yet remains – Will it be different this time around and if so why? To answer this question let us first dive into the primary reasons and numbers behind this retail investor frenzy that we are witnessing globally, into financial markets.
Rally in various asset classes
Asset Classes globally are witnessing an unprecedented surge, driven as usual by liquidity and the prospects of a strong post-pandemic boom driven by huge pent up demand of revenge vacations and shopping. However, one thing that stands out in this deluge is a large portion of this liquidity is driven by retail investors. In India, we have seen the number of individual investors in the market increase by a whopping 142 lakh in 2020-21, with 122.5 lakh new accounts at CDSL and 19.7 lakh in NSDL, according to a State Bank of India report. The table given below shows us a significant increase in DEMAT accounts after the global pandemic hit the market. This is primarily due to the vast inflow of retail investors into the equity market, aided by a huge market rally.
Heightened retail participation
In the US, retail participation in January 2021 alone was such that roughly six million Americans downloaded a retail brokerage trading app, joining well over 10 million Americans who opened a new brokerage account in 2020 according to Deloitte data. There are likely several reasons why so many new individuals have embraced stock investing. The pandemic no doubt contributed to the spike in interest.
Millions of individuals suddenly found themselves with extra cash, and more time on their hands. Looking at the increased participation of retail investors, Nasdaq has recently announced the launch of a new dataset that provides reliable information into the trading activity of self-directed retail investors in the U.S. equity market. Given in the study below we can see that retail participation beginning to take off in Q2 of 2020 after Covid-19 bought a significant slowdown in global markets. Now we can see that retail trading volumes are as much as mutual funds and hedge funds combined again aided by a huge market rally.
Indian stock markets indices, the Sensex and the Nifty have been rallying at all-time highs, the SENSEX Stock Market Index reached an all-time high of 62245.43 and Nifty 50 crossed 18,604.45 in October of 2021. With intensifying growth and the number of good companies, retail investors have a lot of confidence in investing in the market now. The enthusiasm is also clear from retail investors from the subscription of recent initial public offerings. The trend is catching up in tier II and tier III cities as well. For Example, the state of Assam saw more than 200 per cent year-on-year rise in retail investors, followed by Manipur and Mizoram, which saw over 100 per cent rise in the retail investor community, BSE data showed.
Now let’s dwell on some of the factors leading to this retail influx
Work from Home: The pandemic especially during 2020 led to a global WFH (Work from home) culture that provided more time in the hands of individuals and dabbling in financial markets became amongst their favourite pastimes. This also has led to a larger pie of the Indian household savings percentage being directed to financial instruments Vs Non-financial.
Digitisation: Digitisation of financial products and currency i.e. (adoption of online banking) has helped retail individuals open DEMAT/ broking accounts, buy global equities, gold, crypto and a lot more without having to leave their homes and has been a major catalyst towards this increased participation.
FOMO (Fear of Missing out): The pandemic has made our physical lives more distant but our digital lives closer be it social media, telephonic or video interactions or even digital hangouts. This digital overload of information has made investors more connected to other investors and feel left out seeing the gains they have made and in the fear of missing out on further gains investors have poured in their savings into the best performing spaces like equities, crypto etc.
Regulations: In the Indian context several regulatory changes are making it easier for investors to access a wider canvas of products in an easy and hassle-free manner. Viz. Regulator enabling /supporting online payments, account openings/KYC.
Stagnation of Real Estate: Real Estate prices have not moved much over the last few years and add to it the hassles of property management, real estate as an asset class looks unfavourable which has also led to a flight of new capital into non-movable assets.
Will this trend continue especially in a post-COVID world?
Basis the trends we have witnessed in other countries, I feel this trend will continue, primarily because some of the reasons mentioned above especially the ones around regulations and digitisation are irreversible. Needless to say, the texture might change and in future, there will be periods where retail participation could move from equity to other products like fixed deposits, corporate bonds, real estate (through REIT's) etc.To summarise, Covid has surely bought over a welcome change in the way we invest due to the widespread tech adoption catalysed by better regulations, transparency in this new metaverse.