Equity buying by retail investors at a 15-month high

Buying by retail investors and high networth individuals surged to a 15-month high after a sharp drop in prices brought out value seekers.

Data from Bombay Stock Exchange show they have net-bought shares worth Rs566.16 crore so far in August, the highest since May 2010 when they had net-bought equities worth Rs1,163.11 crore.

In between, they have been net sellers.

Experts said some investors may have been lured by the sharp correction in the wake of recent global events.

“The withdrawal of money by foreign investors and exchange traded funds (ETFs) due to weak external climate has led to a sharp fall in markets. Some amount of buying is bound to happen as investors have a tendency to average out their past purchases. Also, some of them would be finding valuations of fundamentally good stocks appealing,” said Deven Choksey, managing director at KR Choksey Securities.

The Sensex has fallen 10.51% since the beginning of August after foreign institutional investors (FIIs) net-sold equities worth Rs8,351.70 crore in last 16 sessions.

Some said compared with the large institutional outflows, buying by retail investors is too small, adding most of them were still waiting on sidelines.

“Retail investors are a lesser force in markets. Some amount of buying would have happened, but most of them are waiting for things to settle down. Currently there is a lot of nervousness among participants which is causing markets to react to slightest of negative news,” said Dhiraj Sachdev, senior fund manager at HSBC Asset Management.

Meanwhile, given the global and local uncertainties, experts see equities remaining under pressure.

“People were expecting some policy reforms to materialise in the monsoon session but those have taken a backseat in the wake of the anti-corruption movement. Global factors are more dominant currently and one needs to analyse what Ben Bernanke, (the chairman of US Federal Reserve) says over the next few days,” said Sachdev.

Choksey said a majority of retail investors remain sceptical and there is crisis of confidence in the wake of new lower targets coming out everyday from foreign brokerage houses.

“Also, selling by exchange-traded funds and hedge funds to meet repayment obligations to banks in the wake of stricter Basel III norms, if implemented, can cause capitulation,” said Choksey.

Mahesh Nandurkar, N Krishnan and Bhavesh Pravin Shah, analysts with CLSA Asia Pacific Markets, on Wednesday lowered their 12-month target for the Sensex from 19500 to 18200.

“While the sharp correction in the market may suggest attractive valuations, we note that the pace of corporate earnings downgrades has intensified in the recent results season,” they said in a note on Wednesday.

“We see downside risk to our bottom-up derived 15% earnings CAGR over fiscal 2011-13 and an even greater risk to the street estimates as we are 3-5% below consensus. We will continue to stay cautious on the markets till we see some evidence of investment demand picking-up,” the CLSA analysts noted.

Yet, others advise this is a good time to pick stocks.

“Even though markets are expected to remain under pressure in the near term mostly due to global concerns, it’s time to start buying in a systematic way over next few months,” said Sachdev.

This is bargain opportunity for those having an investment horizon of 2-3 years as many of the quality large-cap and mid-cap stocks are trading at distress valuations.

“We would see resumption of institutional inflows into emerging markets like India in the longer term as macro economic environment for India gets better with oil prices correcting, prompting the Reserve Bank of India to give up its hawkish stance,” said Sachdev.