Equity markets charged ahead in September and closed the month up 8.4% – the Nifty is up 7.7% in this financial year. Our portfolios trailed the Nifty for the month and on the average are either in line or ahead of the Nifty for the year. The sharp uptrend seems to be due to a benign global equities environment as well as a number of steps taken by the government which are seen as pro-reform. The upward revision in diesel prices and the move on FDI in sectors such as retail and aviation are welcome moves in an environment where the buzzword was ‘policy paralysis’. There are a number of other small steps which have been announced and more are expected over the next few weeks and months. However, just as important as political intent, is the need to remove bottlenecks in implementation of policy. While the government is making some noises on this front, we hope that these will translate into some improvement in implementation of projects which are stuck due to a lack of government action.
Over the past 5 years, when the environment has been none too cheerful, FDI flows have been averaging over $ 30 billion each year, mostly in sectors where free flow of capital is allowed. Besides, with a savings rate of over 30% of GDP, there is sufficient capital available within India. The challenge has been to attract this capital towards productive assets and to provide investors with an environment which is investor friendly.
Let us take a brief look at the savings pattern of the domestic investor. The Indian households and the corporate sector have about $ 1.3 trillion of their savings in banks and also have significant gold holdings which are estimated (as per World Gold Council estimate, India has about 18,000 tons of gold) to be close to $ 1 trillion at current market prices. Last year alone, India imported gold worth $ 55 billion (note that this is more than the total inflow of foreign capital into India last year). Compare this with the cumulative investments in equity Mutual Funds in India, which is about $ 35 billion. These numbers tell you that the Indian investor seems more intent on protecting capital and hedging against inflation rather than generating a positive real return on their capital.
A quick study of the returns delivered by various assets classes over the past 20 years throws up some surprising facts. Inflation has averaged 8.0% annually over the past 20 years, which means if you had Rs 100 in 1991 you would need Rs 467 today to be able to buy the same basket of goods today. The average term bank deposit rate has been 9.3% over the same period – Rs 100 invested in a fixed deposit in 1991 would be worth Rs 639 today assuming no taxes. However, after taxes, this number would reduce to Rs 372, implying that the inflation adjusted post-tax return from fixed deposits is negative. Gold has delivered 10.6% annually over the same period (Rs 100 has become Rs 745), despite gold being up 6 times in the last 7 years (something which is unlikely to repeat in the next 7 years). Equities have delivered 14.5% annually since 1991, despite the 5 year bear market (Rs 100 would have become Rs 1490). So, despite equities having delivered significantly ahead of inflation and other asset classes, there is still a huge resistance to investing in equities. As increased trust develops, we believe more of domestic savings will get channeled towards assets that can generate real rates of return ahead of inflation. Meanwhile, after a 5 year bear market, prospects for returns from equity markets continue to look interestingly poised.