Indian households unlikely to stop investing in stocks, says Morgan Stanley

Despite a record rise in trading by retail investors over the past eight years, Indian households remain "dramatically" underweight in the asset class, says Ridham Desai

Concerns over a slowdown in the global economy are unlikely to stop the flow of retail money into Indian stocks as households have vast scope to expand their exposure to equity assets, according to Morgan Stanley.

Despite a record rise in trading by retail investors over the past eight years, Indian households remain “dramatically” underweight in the asset class, with stocks comprising only 5%-6% share of their wealth, said Ridham Desai, managing director at Morgan Stanley India Company Pvt. Ltd. 

Indian households save roughly 20% of gross domestic product, equivalent to about $700 billion a year, he said. Just a tenth of that earmarked for equities would add $70 billion of inflows into stocks and still leave plenty for other asset classes, he said. 

“We see this as something that could continue for the next couple of decades,” Desai said in a Bloomberg Television interview with Yvonne Man. Currently, about half of the household balance sheet is in property and 15% in gold, with the precious metal “probably at risk relative to equities,” he said. 

Desai remains bullish on Indian stocks despite the record exodus of foreign investors, who have withdrawn about $33 billion from the domestic market the past 10 months. Retail investors aren’t likely to retreat even amid worries about the macro economy unless there was a “very sharp fall,” he said, adding that the domestic departures would likely be “temporary.”

Morgan Stanley expects the NSE Nifty 50 Index to deliver double-digit returns over the next year, which should continue to buoy retail interest. By contrast, the S&P 500 Index “could decline by 10% going into the next 12 months,” he said.  

To be sure, Indian companies have faced a challenging quarter through June as margins were squeezed by higher material costs. However, firms have resisted the temptation to pass the full load on to consumers to preserve volume growth.

But with commodity prices coming off their highs, Desai said the pressure on margins has eased, which could give companies another lift.