The current rally in the Sensex is almost wholly driven by FII investments, and the narrow market means it will collapse once FIIs exit.
Even so, an analysis by Morgan Stanley suggests that things are taking a turn for the better, more so since, with changing demographics and falling dependency ratios, savings rates are also rising. Household demand for risk assets, Morgan Stanley concludes, ?could surprise on the upside?.
In the first six months of the year, data shows, household purchases of gold were up 90%, in terms of tonnage. During this period, investments in public provident funds, small savings and gold deposits rose 200%. All of which would suggest that households remain essentially risk-averse.
What’s interesting, is that purchases of residential units in the top 7 cities increased from 38,000 units in the first half of 2009 to 92,000 in the first half of 2010, a rise of 144%. Mortgage loans are up 183%, suggesting the unit value of housing is up. Insurance premium payments rose by over a third, and equity purchases rose seven-fold, albeit from a very small base.
Bank deposits took a huge tumble, falling by over a fourth in the first half of the year. Not surprisingly, fixed-income mutual funds also took a beating. While a fall here doesn’t gel with a rise in investments in small savings, it is likely that smaller savers still favour fixed-interest securities while bigger savers are now returning to equity.
In terms of purchase values, Morgan Stanley estimates that households invested $7.2 billion more in gold in the first half of the year as compared to the first half of 2009 ($13.1 billion compared to $5.8 billion), $4.5 billion more in property, $5.9 billion in PPFs and other small savings.
Bank fixed deposits fell $11.5 billion (for households, it has to be emphasised), fixed-income mutual funds fell $8.2 billion while equity purchases rose to $4.8 billion in the first half of 2010 as compared to just $0.3 billion in the first half of last year. Risk appetite is back.