 "Domestic equity inflow at $300 bn in 10 yrs: report")
Morgan Stanley, the global investment banking entity, says domestic investors are likely to become a dominant force in the Indian capital market over the coming decade.
It estimates that domestic flows are likely to top $300 billion in the coming 10 years. To put this number in perspective, domestic households have put only $50 bn and foreign institutional investors about $135 bn in the previous 10 years.
“The scars from losses made in the early 1990s when equities were popular among the Indian retail fraternity have faded, in our view. A new generation is looking at equities. With regulations and demographics now more favourable for investors, investor education having increased, and a less risk-averse population, the qualitative environment favours equity investing,” says a Morgan Stanley report titled ‘India's domestic liquidity supercycle’, co-authored by Ridham Desai and Sheela Rathi.
Low base effect
Equity as a percentage of financial assets is less than four per cent compared to a peak of more than 10 per cent in the 1990s. Since then, there has been a secular decline in equity savings. Morgan Stanley says domestic equity ownership is starting from near all-time low levels.
Positive real rates
It says equity savings are correlated to real rates—higher the latter, the greater the flow into equities. More, it’s better if real rates are achieved through lower inflation rather than high nominal rates. “We are seeing a slew of…actions from the government and, with help from the Reserve bank of India, real rates are now positive, led primarily by lower inflation expectations,” it says.
High growth
The brokerage says there could be an acceleration in earnings growth over the coming months, which would augur well for equity saving, as it boosts equity returns. “Our confidence that growth is returning is premised on what crucial leading indicators are doing — corporate balance sheets are improving, financial conditions appear to be easing, capital spending is rising nicely and money supply growth is accelerating.”
Improving trailing equity returns
Equity has been the best-performing asset class in India over the past three years. This will act as a key trigger for shift in asset allocation in favour of equities, as retail investors are anchored to trailing returns, says Morgan Stanley. “Retail investors, on aggregate, react with a lag to asset class returns. Like we saw in the case of gold, which became India's favourite investment post the credit crisis, it has taken almost 24 months of solid outperformance by equities for equity flows to return.”
Future equity returns
Another important catalyst in attracting household savings into the equity market is favourable return forecasts for the next decade.
“We believe equities will likely be the best performing asset class in the coming decade for domestic investors. We expect the BSE Sensex to deliver annual returns of 14 per cent over the next 10 years, based on our residual income model,” Morgan Stanley says.
It estimates that domestic flows are likely to top $300 billion in the coming 10 years. To put this number in perspective, domestic households have put only $50 bn and foreign institutional investors about $135 bn in the previous 10 years.
“The scars from losses made in the early 1990s when equities were popular among the Indian retail fraternity have faded, in our view. A new generation is looking at equities. With regulations and demographics now more favourable for investors, investor education having increased, and a less risk-averse population, the qualitative environment favours equity investing,” says a Morgan Stanley report titled ‘India's domestic liquidity supercycle’, co-authored by Ridham Desai and Sheela Rathi.
Low base effect
Equity as a percentage of financial assets is less than four per cent compared to a peak of more than 10 per cent in the 1990s. Since then, there has been a secular decline in equity savings. Morgan Stanley says domestic equity ownership is starting from near all-time low levels.
Positive real rates
It says equity savings are correlated to real rates—higher the latter, the greater the flow into equities. More, it’s better if real rates are achieved through lower inflation rather than high nominal rates. “We are seeing a slew of…actions from the government and, with help from the Reserve bank of India, real rates are now positive, led primarily by lower inflation expectations,” it says.
High growth
The brokerage says there could be an acceleration in earnings growth over the coming months, which would augur well for equity saving, as it boosts equity returns. “Our confidence that growth is returning is premised on what crucial leading indicators are doing — corporate balance sheets are improving, financial conditions appear to be easing, capital spending is rising nicely and money supply growth is accelerating.”
Improving trailing equity returns
Equity has been the best-performing asset class in India over the past three years. This will act as a key trigger for shift in asset allocation in favour of equities, as retail investors are anchored to trailing returns, says Morgan Stanley. “Retail investors, on aggregate, react with a lag to asset class returns. Like we saw in the case of gold, which became India's favourite investment post the credit crisis, it has taken almost 24 months of solid outperformance by equities for equity flows to return.”
Future equity returns
Another important catalyst in attracting household savings into the equity market is favourable return forecasts for the next decade.
“We believe equities will likely be the best performing asset class in the coming decade for domestic investors. We expect the BSE Sensex to deliver annual returns of 14 per cent over the next 10 years, based on our residual income model,” Morgan Stanley says.