Great expectations

| Updated on: Jan 16, 2022
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New investors in stock markets should be educated about the risks in equity investing

Indian equity markets have begun 2022 on a strong note with the benchmark indices recovering smartly from the correction in December. With the rally showing no signs of abating, despite Omicron disrupting the economy, retail investors are likely to be misled into thinking that the strong gains recorded in 2020 and 2021 could be repeated this calendar as well. Of concern is the fact that there has been a large wave of new investors entering the equity market over the last two years as the pandemic provided more free time to white-collar workers to dabble in stocks. This surge is reflected in the increasing share of retail investors in stock market turnover; they account for over 40 per cent of equity derivatives turnover and over 50 per cent of cash trading.

The remarkable surge has been stoked by two factors. One, there has been a broad based rally in equities since the April 2020 lows with large, mid and small-cap indices gaining 126 per cent, 171 per cent and 256 per cent, respectively. Two, a lot of excitement has been drummed up by the new-age initial public offers such as Zomato and Paytm which drew another set of investors to stock markets. This resulted in increasing demat accounts in NSDL by 19 per cent between April and November 2021 when compared with the same period in 2020; the increase in new accounts on CDSL was 88 per cent.

It is doubtful if these investors are aware of the risks in equity investing. The increase in stock prices since the 2020-low was largely driven by the liquidity support from central banks and ultra-low interest rates. But with economies beginning to recover from the pandemic impact, central banks led by the US Federal Reserve have indicated that rates will begin rising in 2022 and liquidity will also be gradually withdrawn. This will reduce the global investible surplus, impacting demand for stocks. The rally in Indian equities has been stronger compared with other emerging economies. This has led to many global brokerages advising investors to go underweight on Indian equities. Corporate earnings growth is also likely to be less robust going forward due to higher input prices, increasing interest rates and removal of base effect. Returns from equity are, therefore, likely to be much lower compared to 2020 or 2021. Investors who have forayed into stock markets need to be made aware of the immediate risks as well as the cyclicality in stock price returns. There is a chance that these investors will exit equity investing when faced with large price corrections. SEBI needs to increase its investor awareness campaign in this regard, especially stressing the need to invest for the long-term and not indulge in trading. The recent statement by the CEO of Zerodha that less than 1 per cent of equity traders generate returns higher than bank fixed deposits is a true representation of the futility of day trading. This needs to be communicated widely to all retail investors, along with the risks involved in speculating in initial public offers.

Published on January 13, 2022

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