Last month we spoke of the fundamental picture of the market, wherein we discussed Sensex earnings over time and what that means for the overall level of the Indian stock market. This month, we will try to understand the longer term technical picture of the market.
Since Jan 2008, when the stock market peaked, FIIs have bought $ 72 bn of Indian stocks. This is roughly 50% of their total investments since 1992 when they were first allowed into the Indian market. During the same period, equity raising by companies totalled roughly $ 32 bn – so roughly $ 40 bn of FII money has flowed into the secondary market since December 2007. However, the current stock market is almost at the same level as what it was in January, 2008. It is therefore reasonable to conclude that this $ 40 bn of secondary market purchases (roughly $ 8 bn a year) must have been met by an equivalent amount of sale from domestic investors, to keep the market trapped in a range.
Let us look at the domestic Indian household, who has displayed remarkably stable behaviour as far as savings go. India’s savings rate has averaged roughly 30% of GDP over the last 20 years. Over a 40 year period, the average is 25%, weighed down by earlier years. Of the 30% number, a bulk, roughly 23% is contributed by household savings. Of the total savings of 30%, roughly half is contributed by financial savings and the other half by physical savings (real estate, gold and other physical assets like factories etc.). The total financial savings over the last 3 years has averaged $ 200 bn. 50% has gone into bank deposits, and the amount allocated to purchases of shares and debentures has averaged only 5% over the last 20 years. Low as this number is, the last 4-5 years paints an even worse picture where with the exception of year ending Mar 2010 every year was close to zero or negative. This has actually never happened in India’s history, since 1980.
Supporting evidence of the fact that the retail public has deserted equity are everywhere – from the number of demat accounts being closed to the number of MF folios being shut down and now to the recent data of the 500 odd stockbrokers who shuttered down in the current financial year. This anecdotal evidence sits squarely with the roughly 3-4% negative investment of financial savings into equities over the last 5-6 years. In order to even make an average 5% allocation to equities over the next 5 years, domestic investors will also have to add back what they have withdrawn over the last 5 years, taking the total allocation to a much higher number. One can also argue for a higher allocation to equities in line with global norms, given that a large proportion of the 35-55 age bracket professionals in India started their working lives post the economic liberalisation, when salaries and work attitudes are more in tune with global norms.
One of the other reasons for poor allocation to equities over the last 5-6 years, has been that competing assets for money that wants to beat inflation – real estate and gold have done exceptionally well over the last 10 years. While we don’t claim to be experts in these 2 asset classes, there is some evidence to suggest that these two asset classes are unlikely to deliver the blockbuster returns that they have delivered over the last 10 years. This may further push investors to allocate more to equity over the coming years.
Broadly, our assertion in last month’s letter that the set-up conditions for the bull market are in place, is complemented by the technical data which seems to point in the same direction.