Over the last few quarters, a lot has been written about retail investors being mere spectators as the markets have seen a sharp rebound starting March 2009 and scaling the 20,000 Sensex levels in the consequent pull-back.
There has been a lot of debate on when retail investors would return to the markets. While there has been some degree of retail participation in the last few years through asset classes such as mutual funds and unit-linked insurance plans (Ulips), direct participation in secondary markets remains muted at present. One reason (among many) for the slowdown in direct retail participation into equity markets has been the correction of 2008 which caused many a retail investor massive erosion in their portfolios. The year 2007 saw a flood of investors entering the direct equity bandwagon and the steep correction of 2008 hammered not just portfolios but confidence as well. Traditionally, Indians have also favoured assets such as property and gold and the heady growth of these asset classes in the last few years have led to the neglect of equities. It is no wonder that a country of our size has just 15 million demat account holders.
However, is the future going to be as bleak? Would India continue to miss the equity bus, while foreign investors make hay? Let’s try and find some answers to this puzzle by looking at some factors that would influence how things pan out.
Savings, risk appetite and financial literacy: Indian culture that gives importance to saving for a rainy day is well reflected in the savings of the nation. Indian household savings that stand at more than a quarter of the gross domestic product (GDP) are among the highest in the world. The current share of equities and equity-linked investments, however, stands at just about 5%. Bank deposits are at 60%. With the Indian economy expected to see an 8-10% per annum growth over the next decade and a half, incomes and savings potential is expected to grow dramatically. Increase in savings potential is a natural driver of financial literacy and risk appetite. It is also forecast that discretionary spending will rise to 70% by 2025 from 50% at present, fuelling a boom in consumerism.
Demographics and interest rates: Almost 60% of the Indian population is less than 40 years old today and 88% of the Indian population is expected to be below 60 years of age by 2025. Empirical data clearly shows that the most productive savings age of an individual is between 40 years and 60 years. It is estimated that the number of Indians earning between Rs 2 lakh and Rs 10 lakh per year is expected to go up from 50 million today to 500 million by 2025. This shows the potential of dramatic increases in the savings pool of the country over the next decade or so. This large quantum of savings will also be faced with the prospect of falling bank interest rates and high consumption-driven inflation. A combination of these factors would lead to a higher percentage of savings being channelized into the equity markets. A peek into history reveals that the same combination of factors at the start of the 1980s in the US fuelled the equity cult in the US for the next 25 years. India, through its percentage of working population and demographics, mirrors the US of the 1980s.
Technology and transparency: The proliferation of telecommunication and broadcasting technology has brought the equity markets into the homes of retail investors. Business channels are providing investors with unprecedented amounts of information on markets and specific stocks. Availability of the Internet is adding to the investors’ ability to directly access the stock markets. The recent regulatory move of allowing trading through mobile phones will take this access to the next level. Over the last decade the capital market regulator, Securities and Exchange Board of India, has worked tirelessly towards making the capital markets transparent. Initiatives such as introduction of dematerialization, online share trading, strengthening the initial public offer (IPO) process have gone a long way in building transparency and trust in the capital markets.
Government policies and regulations: Disinvestment, now being a stated policy of the government, will result in a slew of IPOs of large government-held entities and the mega IPOs of successful companies such as Coal India Ltd will serve the twin objective of adding depth to the markets, while ensuring that first-time investors and returnees come back to the equity fold. As seen in the past, each of these mega public sector IPOs bring with them a large number of first-time retail equity investors. Further changes in regulations around percentage of equity allocation in pension funds have the ability to take the equity markets to a different level. The 401K plan in the US was a tipping point which multiplied retail participation into the equity markets there. A change in the way pension plans are allowed to be managed here can do the same. Pension funds in India have a 2% allocation to equities compared with 40% in the West and 20% in other emerging markets.
Investor education: When you have such conducive facts for the success of equity in the coming decade, it will also require the efforts of companies, regulators and the government to ensure that we work together in spreading the message to the smallest towns and ensure that the coming decade sees decisions based on facts, data and not on beliefs.
As we begin 2011 and start looking to the coming decade, the biggest risk for a retail investor will be the risk of not being invested into equities as an asset class. As we aspire to retire faster, to constantly improve our standard of living, to do things in our later years that we never did in our younger ones, it will be crucial to plan for this golden period and it will be unfathomable to not have equities in this allocable pool. Over the next decade, the emerging markets’ share of the world market capitalization is expected to go up from the present 31% to well over 45% with China and India being the frontrunners. India’s share of the world market cap is expected to go to 9% from 3% today in the next 20 years and we need to be on this bus.
We welcome your comments at firstname.lastname@example.org.
Gagan Randev is CEO, Religare Securities Ltd.