An equity culture is growing in India, propelling benchmark indexes to a record bull run. Now beware a turning of the tide.
For years, the market was a playground for foreign institutions. Since 2014, domestic investors bought $28 billion net of stocks, matching overseas buyers’ $30 billion inflow.
Unlike China’s mom-and-pop day traders, Indian households tap into the market mainly through mutual funds. Retail investors now own 85 percent of such funds invested in equities, compared with 38 percent of bond mutual funds. So local money managers have become movers and shakers in Mumbai, owing 10 percent of the entire stock market.
Those households are by no means passive investors, however. They’re looking for double-digit returns in an economy with falling interest rates.
Government-backed small savings schemes, once popular with individuals, are less so now. Starting April 2016, the authorities reset rates on these plans every quarter, linking them to government bond yields, rather than subsidizing them indefinitely. The Public Provident Fund, for example, now offers a 7.8 percent return, 30 basis points less than a year ago.
BSE Midcap Index annualized return in dollars since 2014: 26.4%
So far, equities have rewarded retail enthusiasm. Since 2014, in dollar terms, the large-cap NSE Nifty 50 Index has gained an annualized 14 percent, while the S&P BSE Midcap delivered a whopping 26.4 percent per year. Domestic mutual funds have been favoring smaller growth stocks — they have only 43 percent of their portfolios in large-cap companies, versus a 56 percent share for foreign institutional investors, Citi Research estimates.
This flood of money is testing valuations. The S&P BSE 200 Index is trading at 24.6 times forward earnings, well above its 10-year average of 18.5 times. Meanwhile, India Inc. is expected to increase earnings by only 26 percent in the coming year, according to the average of analyst estimates compiled by Bloomberg. Few are predicting a rapid bull run from this point.
Will retail investors who came late to the party have the patience, or the nerve, to buy and hold?
Should they, even? Indian households will gradually grasp the beauty of real interest rates, as the nation shakes off decades of rampant inflation. In June, CPI inflation was 1.5 percent, down from 2.2 percent in May, making those small savings plans the most attractive in five years.
Each to their own, but I’d take a risk-free 6 percent real return on savings over a ride on the Sensex roller coaster any day.