Singapore/Mumbai: India’s retail investors are leaving their mark on a risky corner of the nation’s $1.9 trillion share market: penny stocks.
A custom index of 800 stocks that quote below Rs 5 (7 U.S. cents) has trounced the S&P BSE Sensex index by 33 percentage points this year. The surge was especially strong in June, when the gauge climbed about 10 times faster than the Sensex as India eased its national lockdown.
The outperformance reflects the growing heft of rookie stock-pickers in a country where new trading accounts are opening at an unprecedented pace, mirroring the record sign ups at U.S. brokerages including Robinhood. As in other markets, this optimism doesn’t square with reality of dire economic projections and climbing virus numbers.
“Investors are ignoring the rising virus cases, high valuations and banking on hopes of things going back to normalcy in the next few quarters,” said Rusmik Oza, head of fundamental research at Kotak Securities Ltd. “In this scenario, investing in penny stocks is the most dangerous thing to do.”
India surpassed Spain’s death toll from the pandemic this week, and its economy is set for its first contraction in more than four decades. This hasn’t stopped fledgling investors from buying low-priced shares of companies that are tiny, unprofitable — even bankrupt.
More than 2.6 million new accounts have been opened with the Central Depository Services (India) Ltd. since March, including a record 830,405 in June, according to data from the Mumbai-based share depository.
Zero Revenue
Companies that have zero revenue make up about a fifth of the 800 stocks in the custom basket, and prices for some have doubled while the market value of others has run up into millions of dollars.
Siddha Ventures Ltd. has seen its shares jump more than 800% since April 1 to Rs 3.42 apiece, while Jain Studios Ltd. has surged more than 400% to Rs 3.32 in the period.
It is hardly a story unique to India. Trading volumes in the U.S. for the broader penny stock market have jumped to a two-year high as speculative options bets surge and investors pile into insolvency stocks the likes of Hertz Global Holdings Inc. and Whiting Petroleum Corp.
Back home, stocks with “zero equity value” such as GTL Infrastructure Ltd., Suzlon Energy Ltd. and Jaiprakash Associates Ltd. have more than doubled since April, said Nirali Shah, a senior research analyst at Samco Securities Ltd.
The euphoria can only last so long, she said.
“There is a high probability that the trend will fizzle out and not continue for long,” Shah said. Once selling starts and lower circuits are triggered is when “the reversal of the trend will begin.” – Bloomberg
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