Risk-averse HNIs may return to equity markets in few months

India's high networth individuals (HNIs), who are waiting on the sidelines over the past few months due to ongoing credit crisis following the IL&FS debacle, are expected to return to equity markets in the next couple of months.

According to B Gopkumar, Reliance Securities ED and CEO, the market has been volatile for the past one month and not just post the Budget announcement.

"My view is it is just not linked to India specific Budget issue but led by other global issues, as emerging market indices have been down as well," he said.

According to him, HNI participation in the market has been low due to weak cash market situation. "There is less amount of leverage in the market," said Gopkumar.

"A lack of interest is seen in this space. The market has been very volatile and generally during such time, people don't buy midcaps and smallcaps. From an index perspective, it is driven by 10-15 stocks over the last six months. But, BSE 200 and other broader indices have not seen any large movement," Gopkumar said, adding that HNIs are waiting for the volatility to pass before participating in the market.

Also, negative news about the country's consumption story has also kept HNIs away from the market.

"These are cycles. Once volatility ends, the HNIs will come back, perhaps in 2-3 months, as confidence comes back," he further said.

Recently, the HNI category took a hit after the FM in the recently-concluded Union Budget proposed to increase the surcharge on individuals having taxable income above Rs 2 crore.

Hence, the effective tax rate on their incomes now stands at 39-42%.

Rahul Shah, VP – equity advisory group, Motilal Oswal, said HNI participation usually turns sluggish whenever the market is down and broader indices are either negative or underperforming.

According to him, the NBFC crisis, corporate defaults, rating downgrades are seen across several midcaps and smallcap firms.

"The midcap and smallcap indices' underperformance is mainly on account of the slowdown in the economy. Earnings and pricing of many mid-size and small-size corporate are under stress," Shah said.

For HNIs to come back, midcaps and smallcaps need to bounce back. Investors would also closely follow the earnings, monsoon, and how the global macros are shaping up, he added.

According to A K Prabhakar, head – research, IDBI Capital, volumes have been low, though the market should not be called "volatile or depressed".

"Everyday some corrections are happening due to some reasons. However, this creates an opportunity for good buys," he said.

According to him, the insurance sector has been performing well, while Infosys, IndusInd Bank and Avenue Supermarts, which owns and operate the brand DMart, are expected to witness a rally on the back of strong quarterly earnings. On the other hand, the NBFC sector may come under pressure after DHFL announced it "may not survive as a going concern".

Prabhakar said midcaps and smallcaps have been underperforming for about 19 months, and once those indices start outperforming key benchmark indices, some midcaps are expected to post good returns.

However, HNI traders are waiting on the sidelines since the past four months, as IL&FS issue and the ongoing credit crisis have impacted their liquidity as well.

"Their funds are blocked, and we don't expect any incremental investment to come. A revival may be seen in 4-5 months," Prabhakar added.