Retail investors turn buyers when institutions head for the exit

 

77% of the stocks in which retail investors hiked stake as at end-March 2021 are from the mid- and small-cap space

That retail investors sell at lows and buy near peaks is proving to be true yet again. An analysis of the shareholding pattern of BSE 500 companies reveals that between the market low of March 2020 and the elevated levels of March 2021, it is the small guy who has turned a bull where others such as promoters, foreign institutions, insurers and mutual funds are slowly calling it a day.

This, unfortunately, sets up retail investors as perfect targets for a bear ambush — not an entirely unexpected event now after a sustained period of above-average equity returns.

Retail leads

According to Capitaline data, retail investors (those holding nominal share capital up to ₹1 lakh) have increased stakes in 102 companies in which promoters pared theirs. Similarly, in 175 companies where Foreign Institutional Investors (FIIs) reduced their stake, retail investors increased their holdings.

This trend plays out in stocks where domestic institutions trimmed holdings as well. In as many as 185 stocks where mutual funds pared holdings and in the 80 stocks in which insurance companies cut stakes, retail investors increased their grip.

 

Put together, for the 310 companies where retail investors hiked stake, 281 companies saw the small investor holding go up by up to 5 per cent while 29 companies saw more than 5 per cent increase in retail holdings.

As equities have continued their journey northwards from the March 2020 Covid lows, FOMO (fear of missing out) has probably induced retail investors to go neck-deep.

Small, mid-cap play

Historically, retail investors are more excited by the smaller companies. In the ongoing bull-run too, an overwhelming 77 per cent (239 of 310) of the stocks in which retail investors hiked stake are from the mid- and small-cap space. In contrast, they have increased their stakes in just 71 companies falling in the large-cap category. With markets having run up sharply, experts advice caution.

“Investments into small and mid-sized companies without considering fundamentals could be risky for retail investors”, says VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services. “Market is currently overvalued going by the conventional parameters of valuation like PE ratio, Price to Book and Market cap to GDP. There is froth in some mid and small caps and the stocks in these categories will generally be slaughtered in a bear ambush, which can happen any time,” he adds.

Late entrant

The S&P BSE 400 MidSmallCap Index was already on a downturn from its peak in 2018 when Covid-19 struck. Thus, latching on to mid and small caps early on would have been prudent. However, retail investors often wait for cues from bigger investors before entering. This tendency allows enlightened market participants to offload a stock that has nearly peaked, while the retail segment joins the party late.

In the top 10 stocks where retail investors have hiked stakes, barring one (Future Retail), the rest of the nine counters have seen massive rise in stock price, with quite a bit of gains possibly coming in the initial part of the rally. Himadri Specialty, in which retail stake went up 19.3 per cent, has gained 86 per cent since March 23, 2020 low. Alkyl Amines saw a whopping 646 per cent stock price gain in this period as did Laurus Labs (up 848 per cent).

However, it is noteworthy that in the 310 stocks where retail investors hiked stake, the average stock price gain is 33 per cent versus 35 per cent for the 190 odd stocks where retail buyers did not hike their exposure.