Market's fate rests on floaters

Judging retail attitude is tricky and involves a lot of data interpretation. One variable is breadth. Institutions focus on the top 500 stocks. If there's positive breadth (advances exceeding declines) and activity in smaller scrips, retail sentiment is upbeat. 

We can also compare net index movements versus net institutional attitude. The net institutional attitude is the sum of the net buy/sell positions of domestic institutions and Foreign Portfolio Investors. If net institutional attitude is positive but the Nifty is falling, there's retail selling. Vice-versa, if net institutional attitude is negative but the Nifty is up, there's retail buying.  

Mutual fund data is also indicative. Those numbers are available on monthly and quarterly basis.  Fund investments are more systematic than direct equity buying. Typically, investors commit to SIPs for at least one quarter, or longer, and hold fund portfolios for around two years. These fund-related data therefore lag direct equity data (like breadth, institutional numbers and net index moves). But changes in fund inflow/outflow trends can confirm retail attitude. 

The last fiscal year saw a sharp rise in retail commitment via equity funds. The mix of debt:equity changed in favour of equity. The total AUM (Assets Under Management) grew from Rs 18.5 trillion in February 2017 to Rs 23.2 trillion in February 2018. Equity-oriented schemes comprise 41 per cent of total AUM, up from 32 per cent of AUM in February 2017. Debt has fallen, to 35 per cent from 44 per cent in February 2017. 

Retail investors held 50.7 per cent of total AUM in February 2018, up from 45 per cent in February 2017.  Retail fund exposure increased from total AUM of Rs 8.3 trillion (February 2017) to Rs 11.8 trillion by February 2018. Total equity AUM was around Rs 9.5 trillion by February 2018, with retail investors holding roughly 85 per cent of all equity AUM. So, retail holdings of equity AUM is Rs 8.1 trillion, up from about Rs 5.8 trillion in February 2017. Part of this rise is due to high capital gains. 

Inflows have also jumped. Between April 2017 and March 2018, total equity inflows amounted to Rs 1.57 trillion, up from Rs 602 billion during April-2016-March 2017, and up from Rs 676 billion in 2015-16. That's 160 per cent increase in inflows, year-on-year. Looking at this and the AUM data, it's obvious that a large proportion of massive 2018-19 inflows came from retail investors. Net institutional investments between April 2017-March 2018 amounted to Rs 1.4 trillion (FPI Rs 250 billion and DII Rs 1.15 trillion).  Equity fund inflows more than matched that number. 

In quarterly terms, net inflow was Rs 265 billion in Q1 (April-June 2017). The Q2 (Jul-September 2017) inflows and Q3 (Oct-Dec 2017) inflows were almost exactly the same, at Rs 496 billion in each quarter.  The Q4 (January-March 2018) saw net equity inflows of Rs 313 billion. Note the dip in Q4 inflows. Seasonal factors like tax considerations, Diwali bonuses, annual bonuses, etc., affect flows. So, it would be wrong to infer too much from such few data. 

But the drop in Q4 may be significant, since it was accompanied by heavy retail selling. The FPIs bought net Rs 140 billion across January-March 2018. Domestic Institutions bought net Rs 249 billion. However, the Nifty was down, falling from 10,435 on January 1, 2018 to 10,113 on March 28. Since the index fell, retail selling outweighed institutional buying during Q4. 

The first quarter of any fiscal is important. That's when individuals (and institutions) formulate investment strategy for the year.  This data needs to be "deseasonalised", due to tax outgo, etc.  But if inflows do stay low through April-June 2018, one could tentatively claim retail sentiment has deteriorated. We'll only learn about this in July, when Q1 data is fully available. 

How persistent is retail sentiment? That is a hard question. Although retail sentiment is proverbially said to be fickle, there's actually some persistence. A core group of committed individuals invest regardless of market conditions. 

Others enter the market only when they think the ‘hawa’ smells good. These floaters can stay in for long periods once they start buying. These ‘floaters’ can also exit for long periods if they suffer losses. Their attitude will be crucial. Retail inflows helped to sustain the big bull run of 2017. Outflows could play an equal part in triggering a big bear market.

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