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The year 2012-13, when retail investors pulled Rs 66,000 crore out from equities, wasn’t an exception. This is a 10-year-old trend, not, as widely believed, from only the Lehman crisis.
As a result, the pattern of equity ownership has changed. The share of the public and others category was 14 per cent in December 2012 from 22 per cent in March 2001; that of domestic mutual funds halved to 3.5 per cent during the period. The stake held by promoters went up to 51 per cent from 49.9 per cent in this period and of foreign institutional investors (FIIs) from 14.7 per cent to 22.7 per cent.
The Economic Survey for 2012-13 highlights the falling proportion of shares and debentures in overall financial savings. These were 8.3 per cent of total financial savings in the 1980s and then increased to nearly 13 per cent in the 1990s, before declining to 4.8 per cent in the 2000s, the Survey says, blaming the fall on poor returns. The compound annual growth rate (CAGR) in returns on the Sensex was 21.4 per cent in the 1990s; in the 2000s, this fell to 10.7 per cent. A rise in volatility is another reason given in the Survey for the fall in retail interest in equities.
The domestic mutual fund (MF) sector, however, believes the real reason for the poor retail participation in financial markets is not merely low return or high volatility. Sankaran Naren, chief investment officer (equities), ICICI Prudential MF, says: “People are happy in investing in real estate and gold, as the returns over the last five years have been good. This is an inverted asset class allocation. Typically, investors should pull out money from asset classes which have delivered well and move into those asset classes which have not.”
What worries Naren is the overall deceleration in bank deposit growth, down to 13 per cent from the 17 per cent levels seen earlier. If people have to be weaned away from physical assets, the returns from financial instruments have to improve and so does the overall economic climate.
The rising influence of FIIs over equities brings with it higher risks. Jimmy Patel, chief executive officer of Quantum Asset Management Company, believes the markets would lack depth if domestic investors stay away. He says, “The introduction of derivatives, coupled with increased volumes in this segment, has made markets very volatile. Only the top 200 companies are liquid stocks and in the remaining 4,800-odd listed companies, promoters hold sway, as their stakes are very high. The increasing share of promoters is also indicative of increased control in their hands, which could be a negative for minority shareholders. We should also ask if an increase in the trading hours has only increased trading activity or has created depth and liquidity."
The markets have failed to move up substantially, though FIIs have pumped in $25 billion against the $13 bn pulled out by retail investors. This exodus, which has been dampening the market, will stop if the market moves, according to Aditya Narain of Citi. He says retail investors will come back if the benchmarks gain 15-25 per cent (Sensex at 22,000-24,000), the economic environment turns more optimistic and regulatory support is forthcoming on distribution incentives. A fall in the prices of gold and a stagnant property market would also help.
Prashant Jain of HDFC MF has a similar view. In a presentation at a recent investor conference, he says Indian investors tend to commit their monies to equities when valuations are high. In FY08, when the market’s one-year forward price to earnings multiple (PE) was over 20x, about Rs 52,000 crore came into equity MFs. In FY13, when the PE contracted to 14x, equity net sales were Rs 12,768 crore. For retail investors to return, the markets will have to move up from the current levels, for them to believe a bull run has started.
