The interesting discovery, if you trawl through the disclosures on their assets filed by politicians and now civil servants, is how little of their money is invested in the stock market — in stocks or in mutual funds. By far the most preferred investment turns out to be real estate. This, despite the innate problems of poor liquidity when you compare with stocks, the prevalence of unaccounted cash in most transactions, the chunkiness of each investment, and much higher transaction costs. What is true of people in public life would appear to be true of wealthy Indians as a whole. A study put out earlier this week said even the very richest Indians hold more of that wealth in the form of real estate than stocks. And the skew is likely to get worse, it would seem.
This isn’t new; it has been known for a long time that only a tiny proportion of household savings finds its way to the stock market. Still, the lack of retail interest in the stock market has become increasingly obvious these last few months. Retail holdings in companies have dropped steadily from 19 per cent of the total to 16 per cent, in the last five years. The assets managed by mutual funds have sharply shrunk in size over the past year. Trading volumes on the market are determined more by day-traders who square off transactions at the end of the day, and by institutional players in the futures and options segment — ie, by purely speculative activity. Even foreign institutional investors have become cautious; there has been very little net inflow of funds in the first five months of 2011.
Middle-class India’s love affair with the stock market began in the 1970s, with ready takers for the under-priced public issues of leading international companies which were forced to offload stock at prices fixed by the government. It was a free lunch, and there were many takers. Even subsequently, initial public offers (IPOs) of shares were usually a sure-fire way to make money. Not any more; the majority of IPO stocks now quote below their offer price. As for the secondary market, most investors have lost money in the past three years, through the see-saw of a boom, bust and recovery. If you get singed, you are likely to stay away from the fire.
And yet, the market’s key metrics don’t look unhealthy. The price-earnings ratio of 17 is reasonable for an economy with nominal GDP growth of about 15 per cent and more, and with corporate profits growing at 14 per cent even in a period of slowdown. The overall value of all listed companies, or their combined market capitalisation, is about 75 per cent of GDP — which is in the mid range when compared with other emerging markets; South Korea has a higher ratio, Thailand a lower one. Even when compared with countries that have stronger corporate sectors and more developed stock markets, the Indian ratio is in the mid-range; France and Germany have lower ratios, Britain and the US higher except during the Great Recession. In fact, India’s ratio of market cap to GDP is substantially higher now than America’s was 20 years ago.
So the moribund state of the stock market could simply be reflecting the fact that by general consensus this is a phase when prices will move only “sideways” (to use analyst-speak). The funny thing about markets, though, is that just when everyone agrees on something, the unexpected happens.
