Retail money can steer markets soon: analysts

Retail money can steer markets soon: analysts

Small investors could soon call the shots in India’s equity markets say some analysts, who expect up to $32 billion (Rs1.26 trillion) of household savings to have flowed into the market in the 12 months to March 2008. This could insulate India’s markets from global shocks, much like China’s and South Korea’s.

This amount is almost double the record $17 billion purchases of Indian equities by foreign institutional investors (FIIs) this year, till mid-December.

Analysts say that at the pace at which retail money is coming into the market, FII dominance will soon end.

According to a study by UBS Securities India Pvt. Ltd, the broking arm of Swiss bank UBS AG, FIIs currently own around 17.5% of the market, or $270 billion in terms of the market cap of their portfolio companies.

Over the past three years, FIIs have heavily sold South Korean stocks. Thus far in 2007, they have sold $28 billion worth of stocks from their South Korean portfolio; yet the Kospi, the benchmark index in South Korea, has gained 30% this year.

“India may not face such large outflows but foreign funds flows will no longer move the market in a major way in years to come," said Manishi Raychaudhuri, executive director, investment research, UBS Securities India.

According to N. Krishnan, head of research at CLSA India Ltd, there will be a significant increase in the quantum of India’s household savings that flow to financial assets, partly because much of this money is now accounted for, a result of a far more effective tax regime. “When money comes from legitimate sources and is accounted in the system, people will try to earn returns on that capital (and not hoard it). Investments in assets such as gold will decrease," he said.

In 2006-07, according to data provided by the Reserve Bank of India, the savings rate in India was 34% of the GDP (gross domestic product). India’s GDP stands close to $1.1 trillion in 2007. This means total savings were to the tune of about $370 billion last year.

Household savings were 28% of the economy, translating into $300 billion, and corporate savings accounted for another 6%. Half of the $300 billion household savings last year went to real assets such as gold and property while another half was parked in financial assets including bank deposits, insurance, provident and pension funds, and equities.

Only $9.45 billion, or 6.3%, of household savings ended up in equities in 2006-07. This will go up to 10% this year, say analysts. Even if the economy grows by 8.5%, this 10% will translate into $16 billion. In 2005-06, only 1.1% of household savings ended up in equities.

“One can see the penetration of mutual funds and local brokerage in small towns. This is a tale-tell sign of growing interest of retail investors," said Sudip Bandyopadhyay, chief executive of Reliance Money.

Another factor that entices retail investors to equity markets is the high return on Sensex, the bellweather Indian equity index, which has gained more than 36% this year on top of 46% last year. And investors who stay invested in the equity market for a year or more do not pay any capital gains tax.

Some household savings also end up in equities through insurance funds. Under current rules, insurance firms can invest 30% of their funds in equities.

UBS’ Raychaudhuri said that between 8% and 10% of household savings could end up in equities through the insurance route.

That translates into another $13-16 billion at most. Together, by the end of 2007-08, around $29-32 billion of retail money could have flown into the equity markets.