Domestic investors close the gap with FPIs
Total domestic investors’ ownership of BSE 500 companies was worth ~23.3 lakh crore at the end of March 2017, up 34.4 per cent in the last two years. Of this, nearly 45 per cent, or ~10.4 lakh crore, worth of assets is accounted for by public and individual shareholders. Total domestic investment in equities would reach ~28 lakh crore, if non-promoter corporate holding is also included.
HDFC Bank, Housing Development Finance Corporation and Infosys - the top stocks for foreign investors together accounted for a fifth of all FPI exposure on Dalal Street. The top three picks of domestic retail investors are Reliance Industries, Larsen & Toubro and HDFC Bank, taking up 15 per cent of all their investment in BSE 500 companies.
The analysis is based on the quarter-end market capitalisation and shareholding pattern of a constant sample of 452 companies from the BSE 500 index.
According to Gopalakrishnan, the process has been accelerated by the continued poor show by competing asset classes in the last few years, making equity even more attractive to investors and savers. “Interest rates have been on a downward spiral for some time now, making fixed deposits unattractive to savers, while real estate and gold prices haven’t gone anywhere in years now,” he adds. The situation is not likely to change in the near future.
The benchmark long-term interest rate in India - as indicated by yields on 10-year government bond - is down 80 bps since March 2015, while it’s up 40 bps in the US during the period. As bond yield denotes the return on riskfree assets, this has made equity more attractive for investors. In contrast, rise in yields has made the Indian market less attractive to foreign investors.
Others attribute it to the relative outperformance of mid- and small-cap stocks over large-cap stocks in the index. “The rise in the relative ownership of domestic investors could largely be due to a sharp rise in the market capitalisation of second- and thirdtier stocks, which are popular with domestic retail and wealthy investors. In contrast, FPIs largely invest in large-caps and index stocks that haven’t moved much during the period,” says G Chokkalingam, founder & chief executive officer, Equinomics Research & Advisory.
According to him, the combined market capitalisation of listed companies on the BSE was around ~105 lakh crore when Sensex hit 30,000 for the first time in March 2015. When the index reached the same level this time, all BSE-listed companies were worth around ~127 lakh crore. “Most of these gains accrued to domestic retail investors either directly or indirectly through their exposure to equities or mutual fund schemes investing in mid- and small-cap stocks,” says Chokkalingam.
Going forward, the large caps are expected to outperform smaller stocks, tilting the scale in favour of FPIs. “Mid-caps are richly valued right now, limiting further gains, while many large caps have become inexpensive. This raises the possibility of a deep correction in the former, if the sentiment turns sour,” adds Chokkalingam.