Proportion of household investment in stocks, debentures highest in 24 years
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Households invested Rs1.825 trillion in stocks and debentures in 2016-17, almost four-and-a-half times the amount invested in the previous year.
They pumped in 10% of their investments in financial assets in 2016-17 into stocks and debentures. That was a huge jump from the 2.73% of investment in financial assets that went into the capital markets in the previous year (see chart).
One reason for the higher allocation was that households’ investment in financial assets went up during the year.
Depressed rates of return from real estate, gold and fixed deposits have led to investors searching for higher returns and have pushed up equity prices.
Another reason would be the increasing attraction of the equity markets as the returns from stocks started going up.
But there is also one other factor that also led to an increase in funds flowing to the capital markets—the decrease in cash holdings as a consequence of demonetisation.
In 2015-16, the amount of incremental cash that households opted to hold was as high as Rs2.005 trillion.
In 2016-17, in stark contrast, cash levels with households went down by Rs3.168 trillion.
Most of this cash was deployed in bank deposits, but a part of it spilled over into stocks and debentures.
Allocations to life insurance funds also went up, from Rs2.66 trillion in 2015-16 to Rs4.406 trillion in 2016-17.
For how long can the flow into equities continue to increase?
Much has been said about the inflows into systematic investment plans (SIPs), the dearth of alternative investment avenues and the investment into equities by provident and pension funds.
But chart 1 has a cautionary tale—the proportion of financial assets allocated by households to investment in stocks and debentures is now at its highest in 24 years.
The last time the proportion of shares and debentures in incremental household assets was above 10% was in 1992-93, immediately after the euphoria generated by the opening up of the financial markets.
That was also the time of the Harshad Mehta scam.
Note also that, during 2007-08, at the height of the last boom, household allocation to stocks and debentures was 9.62%, lower than what it is now.
If history is any guide, a reversal in trend is already overdue.
But a recent report from Kotak Institutional Equities says, “large inflows into equities could continue until the return and ‘cost’ expectations of retail investors change driven by (1) a period of weak returns from the stock market, which will reset the expectations of retail investors to lower levels, and/or (2) a period of good returns from other asset classes.”
Till that happens, the party could go on.