The one-year rolling returns for the Indian stock market, a critical indicator believed to be used by retail investors while making investment decisions, has turned negative for the first time this year as the selloff on Dalal Street intensifies.
One-year rolling returns of Nifty50, Nifty midcap 100, and Nifty 500 are now negative 1-1.5 percent. The one-year rolling returns for Nifty smallcap 100 index is now negative 11.2 percent.
Growing fears that central banks’ moves to tame multi-decade-high inflation could trigger a global slowdown and recession in some major economies has led to sharp selling in riskier assets like equities and cryptocurrencies in 2022.
The benchmark Nifty is 5 percent away from confirming its first bear market in two years, while the Nifty midcap 100 and Nifty smallcap 100 indices have already entered the bear market territory.
A bear market is characterised by a more than 20 percent fall from recent highs.
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Shaken and stirred
Analysts fear that with one-year returns on equities turning negative, the retail investment momentum in could slow drastically in the coming months, especially as fixed deposit rates are on the rise again.
“In our view, a combination of low returns from the market (if the market was to stay flat or decline) and higher fixed deposit rates over the next few months may shake the faith of retail investors in equities,” brokerage firm Kotak Institutional Equities said in a recent note.
It argued that retail investors have ignored lofty valuations and recent price correction as their return expectations are “anchored” on historical returns.
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The one-year return criteria is perceived to be the most commonly used by retail investors, who have net bought more than Rs 2 lakh crore worth of local stocks in the past 18 months, for their investment decisions.
Before the ongoing correction started in October 2021, retail investors enthusiastically bought every dip, given that the market would end up higher with ample liquidity swirling around.
However, “buy-the-dip” strategy has failed as benchmark indices have failed to make a new high since October 2021 amid rising interest rates, geopolitical crisis and tightening global liquidity.
Shift to safety
Market experts believe retail investors could shift to less volatile investment options such as high-rated corporate bonds and real estate.
Portfolio manager said that high net-worth individuals have already started shifting funds to debt and real estate as returns expectations from equities dwindle.
“There will be a slowdown in new capital from retail investors going ahead as the pain shows and as there will be psychological impact of the negative returns of the past seven-eight months,” said a Mumbai-based portfolio manager on condition of anonymity.
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