The market for Retail Investors in 2023 and the impact of digitization and shift in demand

Investment Analysis

Retail investors have had the best 10-year run in markets and the resilience shown by our great country while navigating through one crisis after the other is exemplary. Buy the DIP, and monthly SIPs have worked well and this strategy has generated reasonable returns in the last 3 years that were catalyzed by the liquidity of the system rather than the cookie-cutter “Buy the Dip” strategy. The BAAP (Buy at any price) strategy for companies that demonstrated reasonable growth stands shattered in the face of headwinds lurking around the corner. 

In the year 2023, the prudent investor and the fund managers will have to work harder as they navigate through global uncertainties and realize that India isn’t decoupled yet (c.45% of Nifty company earnings come from exports).

Retail investors had it good through their SIP investments over the last three years (calendar years 2019, 2020, 2021) where index (Nifty) returns were in double digits. The midcap index too has given accelerated returns in 2020 and 2021 completely offsetting the negative returns of 2019. In 2022, the momentum has slowed down with Nifty and Midcap’s indices returning lower single-digit returns. 

This means the retail investor who had enjoyed a double-digit return in equities had got less than FD returns in 2022. This should test the conviction of these guys in 2023 who till now had shown great resolve in keeping up their SIPs (and adding new ones) as FIIs kept selling, Covid causing periodic disruptions, Russia-Ukraine war, Commodity inflation, rise in interest rates and liquidity slowly getting squeezed out.

While these are early days in the new year 2023, the narratives that have led markets all over 2022 remain the same but will be tested as the different measures taken by central banks in India and across the world to normalize some of the excesses will play out more prominently. The following are the main ones that led to great stock market returns in the last three years and which are likely to see a reversal.

  1. Accommodative Government policies in India and abroad to address covid led disruptions started to get rolled back. The expansive monetary policies of the West (India has taken a more calibrated approach in offering low-cost credit and restructuring benefits) have multiplied the money flows and led to raging inflation of 9-10% in US and Europe from under 2% before Covid. These excesses will demand extraordinary measures to soften them and so the FED and ECB vowing to raise interest rates even if that will lead to recessionary conditions. Indian RBI has to play catch up just to keep INR competitive to check inflation seeping in through higher crude import costs.
  2. Pent-up demand and revenge spending due to better savings in lockdown periods has led to an urban consumption boom and were mostly played out in 2021 and 2022. Now that the IT sector and Startups showing early signs of demand normalization and taking a cautionary approach to hiring/pay hikes, the urban consumption momentum might slow down. Rural India is still in shambles with higher unemployment rates as the Covid-led regularization of unorganized sectors resulted in the closing down of many rural-focused MSMEs.
  3. India to be a bellwether in an oasis of global gloom and a major attraction for China + 1 investment strategies might get tested with China re-opening. China is the first Covid causality and most likely the last to get out. Restrictive policies of the Chinese government till most recently have curtailed demand there. The recent loosening of these policies coupled with Covid most likely peaking out might see China witness a spending boom that India and other countries witnessed in their post covid b. Considering the size of the Chinese economy, the boom there will likely see commodity prices flaring up and keeping inflation declining in check-in 2023. Higher prices of Copper, Steel, Aluminum, and sticky Crude prices if the Russia-Ukraine war lingers on don’t paint a rosy picture for inflationary trends in India. Also, India is yet to match China in manufacturing competence and China’s re-opening will be a threat to Indian exports.

Impact of Digitization

India has seen the benefits of digitization during the demonetization period and has seen exponential adaption during Covid times. Digital disruption is rampant in some of the low-ticket consumption items and non-touch-based services. Established companies in these industries like FMCG, Consumer durables, and Banking are seeing increased disruptions and are making accelerated spending to adapt to this new change.

  1. FMCG companies facing disruption through e-commerce and private labels have addressed this by opening their digital outlets (like Tata Neu) or becoming aggressive on platform companies (Amazon, Flipkart). Though the share of sales from digital channels forms less than 10% for the major FMCG companies, the sales growth rate is higher than through the traditional channels. Companies like HUL, which are pioneers of successful brands in India have increased their digital ad spending by 25% last quarter and have started creating exclusive digital brands. For smaller companies like Marico, digital brands today contribute 3% of their annual turnover. The returns though are not significant as yet, companies are getting future-ready. Today, FMCG companies’ growth is more dependent on rural penetration and with rural India getting more internet savvy and less averse to spending online (thanks to the Govt’s schemes like Jandhan Yojana which provided a bank account and a Debit card to the unorganized workforce), eCommerce opportunity is hard to miss for any old or newbie in the FMCG industry.
  2. Banks have faced major disruption from new-age digital fintech companies and have addressed this by investing in IT or tying up with the Fintechs. ICICI bank comes right on top of the stack with its Digital evolution and adoption and its product portfolio. SBI’s Yono platform has seen significant growth in personal loan disbursements. The federal bank has partnerships with 50 Fintechs to offer its products and has seen 75% QoQ growth in digital personal loans in 2Q23. Private banks have taken a lead over PSBs in digital adaption and their loan growths have outperformed the traditional ones by at least 200bps in 2Q23.

The traditional style of conducting business through Brick and Mortar infrastructure is passe and the new consumer is ready to use his phone to build his car online, buy an apartment or pay for the coconut on the roadside.

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