Retail participation adds liquidity risks to Indian markets

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By Sanjeev Sharma
New Delhi, May 20 (IANS)
Retail and non-institutional participation in Indian markets has increased meaningfully, adding liquidity risks in the event of a correction.
“We think the increased retail participation adds beta/liquidity risks to the Indian markets. A change in sentiment/decline in the headline index can lead to a quick withdrawal of non-institutional volumes,” JP Morgan said in a report.
MSCI India has been remarkably resilient through the second Covid-19 wave (barely underperforming EM), yet underlying market dynamics have been deteriorating for some time, it said.
Raising red flags for the market, JP Morgan said institutional participation (foreign plus domestic) is close to 14-year lows even as aggregate daily volumes are up 3x since 2014 at $10 billion a day now, implying that retail/corporate/other participation has increased dramatically, up 5x.
The report said delivery volumes remain well below pre-pandemic levels – volumes of non-delivery/intra-day/speculative trading have doubled in three years.
The percentage of daily volumes traded in stocks with market caps of less than $2 billion has doubled in a year (and is meaningfully higher than pre-pandemic levels).
The proportion of BSE 500 stocks delivering weekly moves of +/- 10 per cent or more doubled through 2020, and India VIX remains above 2019 levels.
Higher participation in smaller stocks seems to show up in sell-side forecasts. Consensus implies 85 per cent EPS growth for the NIFTY mid-cap index between FY20 and FY23, compared to a 47 per cent growth forecast for NIFTY. The mid-cap index has delivered earnings growth less than large-caps’ historically, the report said.
With the market willing to look through the sharp Covid-19 wave, a noticeable global equity correction remains a concern.
Any of rising inflation, slowing Chinese monetary conditions or increasing rates could catalyse a drawdown. Until that happens, stocks with momentum/short-term themes continue to break valuation restraints.
Longer-term investors are faced with two choices to ignore the off-benchmark momentum – which can be painful; or participate – which requires trading agility. The sell side is generally ill-equipped to anticipate momentum.
“We therefore remain underweight consumer discretionary names in near-term. Economic recovery beyond will likely have to be driven by India’s low interest rate environment. We therefore favour the rate sensitives (banks, real estate and, in time, autos) for the longer term,” the report said.

(Sanjeev Sharma can be reached at sanjeev.s@ians.in)

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