RETURN OF THE EQUITY CULT: IS IT HERE TO STAY?
MORGAN STANLEY EXPECTS A STAGGERING 500 BILLION DOLLARS OF SAVINGS TO FLOW INTO INDIAN EQUITIES OVER THE NEXT DECADE
Indian households have never been big fans of the stock market. In a few states like Maharashtra, Gujarat, Rajasthan and Kerala, there may be a widespread culture of buying stocks but outside of that, the average Indian household has generally eyed stock investing with suspicion and mistrust. A pitifully low 4% of aggregate Indian household savings is in equities. But that may be changing.
The darkest hour for equities was around the global financial crisis of 2008. Many stock portfolios plunged 50-70%, investors sold in panic and the foundation of equity, as an asset class, was shaken to the core. Indian investors lost their faith, pulling out 1.7 lakh crores out of the stock market between 2010 and 2015. But as they say in the stock market, the darkest hour is just before dawn.
Over the last two years, the tide has been turning. Indian savers are warming up to equities again and this time it looks like the real thing, not just a passing infatuation. Wisely, this time, most investors seem to have chosen expertise over excitement — entrusting professional mutual fund managers with their savings rather than taking wild punts based on stock tips. The corpus of equity mutual funds has doubled, from 4.3 lakh crores in September 2015 to 8.6 lakh crores today. What is equally important is that investors have decided to make equity investing a regular habit, not a one time leap of faith. Systematic Investment Plan or SIP has emerged as the favoured mode of deployment. At last count, there were 1.7 crore active SIP accounts with equity mutual funds, with close to nine lakh accounts being added every month. The average ticket size may be only around ₹3500 a month, yet it is not the amount which is important, but the habit.
Many factors are driving this change. The steady up-move in the Indian stock market over the last three years has created a pull of its own. More crucially, other asset classes which were the mainstay of Indian household investors, are losing their sheen. Indian savers are risk-averse, as seen in the disproportionately large share of their savings that lie in bank deposits. A new generation of savers is beginning to realise that returns from bank fixed deposits do not create wealth. A one year bank fixed deposit today yields 6.5% — a post tax return of 4.25% — that barely beats our long term inflation rate of 4%, let alone making us rich in the long run.
The other asset that Indians have traditionally loved is gold. This too is losing its glitter. The annualised return on gold over the last three years is only 3.5%. While gold, for reasons of security and emotion, can never fade away completely from the portfolio of Indian households, savers are switching to financial assets for better returns. The sustained lull in the real estate market has turned investors away from investing in property. Real estate was never the most liquid of investments, now even returns have plateaued.
Equity is moving in, to fill these gaps. While the resurgence of interest over the last two years has been impressive, this may be the tip of the iceberg. Investment bank Morgan Stanley expects a staggering 500 billion dollars of savings to flow into Indian equities over the next decade. While this may truly be the dawn of a new era for stocks, it will not be without challenges. Volatility in the market is at all time lows today but it will not be, forever. Along the way, the patience of new investors will be put to test by violent corrections — an intrinsic aspect of markets. At such times, Indian savers will have to display the maturity that is the mark of true long-term investors. We can then be sure that the cult of equity investing is truly here to stay.