Kotak Institutional Equities has raised concerns over the growing trend of retail investors heavily investing in so-called “narrative” stocks, which are largely driven by past high returns and market hype. The brokerage notes that retail investors have now become the largest non-promoter group in several such stocks, leading to potential risks of sharp corrections in the near future.
What Are ‘Narrative’ Stocks?
The term ‘narrative’ stocks refers to those companies that are currently in the limelight due to prevailing market narratives, often propelled by media or speculative interest. Kotak highlights a variety of sectors where these narrative stocks can be found, including defense stocks like Bharat Dynamics Ltd, Bharat Electronics Ltd, Cochin Shipyard Ltd, and Hindustan Aeronautics Ltd, as well as oil and gas firms like IOC, HPCL, BPCL, GAIL, and Oil India. Railway stocks such as Rail Vikas Nigam Ltd (RVNL) and IRFC, as well as power stocks including SJVN Ltd, NHPC Ltd, NTPC Ltd, and Tata Power, are also part of this group.
Retail Investors and Herd Mentality
Kotak’s analysis reveals a significant increase in the shareholding of retail investors in these ‘narrative’ stocks, both in terms of percentage ownership and the number of investors. The brokerage attributes this surge to the so-called ‘herd behavior,’ where retail investors follow the crowd based on the strong past returns of these stocks. However, Kotak warns that these investments are risky and cautions that the returns might not sustain, as recent quarters have seen poor performance from many of these stocks.
Retail Investor Exuberance May Turn to Losses
The study further shows that while the churn rate (the rate of buying and selling) for these stocks was extremely high from March 2023 to June 2024, it has slowed down in recent months. This suggests that retail exuberance may be moderating, and many new retail investors who jumped in during the bullish phase may now be sitting on significant losses. Kotak suggests that if these losses continue to mount, some of these retail investors may exit the market or hold on to their stocks for an extended period in the hope of recovery.
Valuations Still a Concern
Kotak also points out that many of these narrative stocks, despite facing negative sentiment in recent months, are still trading at expensive valuations compared to their fundamentals. The brokerage believes that further downgrades are likely, and this overvaluation could lead to more corrections. This puts new retail investors at significant risk of further losses if the high-growth narratives that have driven these stocks fail to materialize.
The Retail Bets on Dalal Street
Some of the largest retail bets on Dalal Street, as per Kotak’s analysis, include stocks like YES Bank Ltd, Tata Steel, IRFC, Suzlon Energy Ltd, Vodafone Idea Ltd, Jio Financial Services Ltd, Tata Motors, Reliance Power Ltd, and Tata Power. These stocks have garnered substantial retail investor interest, and with many of them already experiencing steep corrections, Kotak warns that retail investors are exposed to further downside.
Conclusion
Kotak Institutional Equities’ report highlights the risks of excessive retail investment in narrative stocks. With many of these stocks still expensive despite poor recent performance, new retail investors could face substantial losses. The brokerage urges caution, suggesting that the market exuberance seen in these stocks may not be sustainable in the long run, especially if the underlying narratives fail to materialize as expected.
