Kotak Institutional Equities is not impressed with what it calls the 'herd' behaviour of retail investors. It said retail investors have become the largest non-promoter group in many 'narrative' stocks and believes such retail bets are based mostly on past high stock returns. There are risks for sharp corrections in such stocks in the months to come, it warned.
Kotak counts defence stocks Bharat Dynamics Ltd, Bharat Electronics Ltd, Cochin Shipyard Ltd, Garden Reach Shipbuilders & Engineers Ltd, Hindustan Aeronautics Ltd and Mazagon Dock Shipbuilders Ltd with ones with 'narrative'. Oil marketing companies IOC, HPCL and BPCL and oil & gas firms GAIL and Oil India; railway stocks Rail Vikas Nigam Ltd (RVNL) and IRFC; and power stocks SJVN Ltd, NHPC Ltd, NTPC Ltd and Tata Power Company Ltd are also termed as 'narrative' stocks.
"Our analysis of shareholding of ‘narrative’ stocks shows a disproportionate increase in the shareholding of retail investors (percentage ownership and absolute numbers of investors). This ‘herd’ behavior reflects strong conviction stemming from past high returns from this basket of ‘riskier’ stocks. The faith may be tested by very poor returns of the past two quarters," it said.
Kotak said the ‘narrative’ stocks had seen extremely high churn in March 2023-June 2024, when these stocks were seeing sharp price increases. But the churn rates moderated in recent months, which suggests that retail exuberance levels have somewhat moderated and a large number of ‘new’ retail investors are now sitting on large losses.
"Further compounding of losses among ‘new’ retail investors may challenge the longevity of their participation in equity markets or may make them long-term (very) in the stocks," Kotak said.
Kotak said that while the Street expectations around many ‘narrative’ stocks have turned negative in recent months, many of the stocks are still very expensive versus their fundamentals despite the recent downgrades, which raises the risk of further correction in many of these stocks in the coming months.
"Consequently, the ‘new’ set of retail investors face large ‘risk’ of further losses, if the low-probability narratives were to fail to materialise," it warned.
YES Bank Ltd, Tata Steel. IRFC, Suzlon Energy Ltd, Vodafone Idea Ltd, Jio Financial Services Ltd, Tata Motors, Reliance Power Ltd and Tata Power Ltd are some of the biggest retail stock bets on Dalal Street in terms of number of retail investors.