Wednesday, October 28, 2020

Shelter in Place

What Are People Doing at Home? Watching Netflix, Riding Peloton, Eating Beyond Meat Burgers and ... Trading Stocks!

By POOJA MALIK/Guest Contributor

In the U.S., retail trading platforms like Robinhood, Schwab and E-Trade have recorded blockbuster volume growth as people staying home now have a glut of time and are using it to trade stocks. 

This trend is more extreme in Asia. Even Pre-COVID-19, many Asian markets had significant retail participation. In a SIP world, with more people at home, retail participation in Asian equities has exploded. Several exchanges and brokerage firms have cut market charges and commissions for retail investors, further incentivizing them to trade. For example, in Thailand, retail participation has increased from 27% to 48% as the Thai exchange made it easier and cheaper for retail investors to open accounts and trade. Many other Asian countries have seen the same trend, as summarized in the chart below.

Click chart to enlarge.

An interesting point of note is that retail investors across most of Asia have been net buyers of equities, absorbing the selling pressure from foreign investors that have significantly withdrawn from the region. For example, in Taiwan, retail investors have net bought over $23B of equities while foreigners have net sold about $20B of Taiwanese equities over Jan-May 21. Retail investors have been supporting the markets through this high level of buying activity.

Click chart to enlarge.

The stocks being bought by retail investors have witnessed significant rallies. Our research shows that on average, retail investors buy small cap, high beta and volatile glamour stocks. They generally prefer to buy stocks that have lottery-like characteristics, i.e. a small probability of a huge outcome. Their recent trades have exhibited the same patterns. This can be seen in the performance of small cap high growth stocks that are listed on secondary exchanges (and are usually not eligible for listing on the main exchange, given their size, liquidity and volatility characteristics). For example, in China, the ChiNext Index has outperformed the CSI300 Index by over 20% so far.

Click chart to enlarge.

If retail investors continue to be large net buyers of stocks, we could witness a sustained rally in these small cap high beta stocks, pushing their already inflated prices further away from fundamentals.

Nipun Capital is an Associate Member member of TEXPERS. The views expressed in this article are those of the authors and not necessarily Callan nor TEXPERS.

About the Author:

Pooja Malik, CFA, is a General Partner and Managing Member at Nipun Capital, L.P. Malik founded Nipun based on the outlook that Asia ex-Japan equity markets would double in size from 2010 to 2030 as a portion of global market cap. Today, Nipun manages approximately $200 million of capital on behalf of institutional investors globally including public and corporate pension funds, endowments, foundations, sovereign wealth funds and family offices to help them exceed their long-term objectives. Malik brings over 15 years of asset management experience to the Nipun team and her areas of focus are in portfolio management and research. Prior to Nipun, she was a Managing Director at Barclays Global Investors (BGI)/BlackRock in the Active/Scientific Equities group, where she managed various long-only and long-short portfolios in excess of $100 billion for institutional investors. As the co-head of the North American investment teams, Malik led all aspects of portfolio management and research for U.S. Small Cap and Canadian strategies as well as shared responsibility for U.S. Large Cap strategies. At BGI/BlackRock, she co-headed the largest investment team within the Active/Scientific Equities group. Before focusing on portfolio management, Malik was active in research for the Asian strategies. Prior to that, she worked at ICICI Bank, India’s largest private bank where she managed a loan portfolio. Malik was named by Institutional Investor Magazine in 2015 as one of the Hedge Fund Rising Stars. Subsequently, in 2016, Hedge Fund Journal named her as one of Tomorrow’s Titans. Malik graduated from Delhi University and received an MBA from Indian Institute of Management, Bangalore. She is also a Chartered Financial Analyst charterholder.

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