Retail investors still cool to bull run

Indian households prefer debt over equity.

The Sensex may be scaling new peaks with the market capitalisation nearing Rs 19,00,000 crore but retail investors are still hesitant to join the party.

Even though the compounded annual growth rate (CAGR) of the nominal returns on equity has been 44.9 per cent over the last three years ""38 per cent higher than the CAGR of the returns on debt"" Indian investors prefer debt to equity.

Only 1.4 per cent of household savings flowed into the equity market in 2003-04 (the latest figures available) and it is unlikely to have gone up significantly since then given the trend over the last few years.

While Indian investors are shying away from the stock market, overseas players are reaping the harvest of a soaring Sensex.

Between March 2001 and December 2004, the Indian public's holding in equity shares declined from 16.9 per cent to 10.9 per cent while the foreign institutional investors' (FII) holding went up from 10.9 per cent to 20.3 per cent. In March 2005, the FIIs share of the market capitalisation went up further to 23.4 per cent while the Indian public's share slipped to 10.8 per cent.

These are the findings of an internal study of investment bank Merrill Lynch's Global Markets & Investment Banking Group.

"Over the long term, across the global markets, equity investments have outperformed debt and other asset classes,' said DSP Merrill Lynch Managing Director Amit Chandra.

On an average, across the countries, the real returns (that is, inflation adjusted returns) on debt instrument has been about 1 per cent while equity investment's yield has been about 5 per cent. A prudent mix of debt and equity could yield at least 2-3 per cent, Chandra pointed out.

In the Indian context, the CAGR on equity over the last eight years has been 26.8 per cent against that of 11 per cent from debt. Over the last five year, the CAGR on equity has been 15.3 per cent against 9.7 per cent for debt.

Oddly, ever since the equity markets have opened up, Indian households have been reducing their focus on equity investments while the rest of the world has been increasing it. In 1994-95, investment in shares and debentures as a percentage of total household savings were to the tune of 13.5 per cent. It came down to 4.1 per cent in 2000-01 (the year the stock markets crashed) and 1.4 per cent in 2003-04.

During the same period (between 1995 and 2004), exposure to deposits, currency and other small savings went up from 61.1 per cent to 70.7 per cent and insurance products from 8.7 per cent to 14.5 per cent. The share of provident and pension funds has, however, gone down from 16.7 per cent to 13 per cent.

From the capital markets perspective, the scenario is disappointing against the backdrop of the underlying economic growth. The gross domestic savings rate went up to 28.1 per cent of the gross domestic products (GDP) in 2003-04, the highest recorded so far. Household financial savings as a percentage of GDP was 11.4 per cent of GDP in 2003-04.

While Indian public holding in equity market has been on a decline, the FIIs have been increasing their exposure to the Indian markets by continuously increasing their ownership.

In March 2001, the FIIs' holdings in the total market capitalisation of Rs 29, 6353.94 crore was 10.9 per cent and that of Indian public was 16.9 per cent.

In December 2004, when the market capitalisation rose to Rs 73,6188.36 crore, the FIIs holding rose to 20.3 per cent while Indian public holdings dropped to 10.9 per cent. In March 2005, the FIIs' holding further rose to 23.4 per cent and Indian public holdings dropped to 10.8 per cent.