Are Indian stocks in bubble territory? An interview given by Uday Kotak to The Indian Express (you can read it here) asks this question. Kotak is making valid points when he says that there is a wall of money coming at the market which does not have enough stocks to absorb the cash. A strong institutional flow is bringing Indian household money to the stock market through mutual funds, unit-linked insurance plans (Ulips), National Pension System (NPS) and the Employees’ Provident Fund Organisation (EPFO). This money is going into a few hundred stocks because the Indian market lacks depth. The market cap of the top stock is Rs6 trillion and that of the 100th stock is just Rs32,000 crore. The market looks overvalued on metrics of the current price-to-earnings (PE) ratio, which is much higher than the 10-year average. Valuations can go back down in two ways—markets can crash, bringing prices down or the earnings can grow; both bring the PE down. The wait for earnings has kept the market buoyant in the past few years and the wait is still on. Which will come first, the market crash or the earnings bump? As retail investors, we have no option but to give our money an equity exposure; see Table 1. But we will never have the relevant insight to time the market. We also know that markets go up and down, get overvalued, crash and then recover. See Table 2. So, is there a way in which we can ride out the bubble, if indeed there is one?
Regulations in the financial sector need to keep evolving as the market grows in depth, breadth and complexity. Think of this as the need for road rules and a traffic management system in a large metro—what worked 30 years ago cannot work today. It was possible to travel 5 km in Delhi without running into traffic lights or traffic cops 30 years ago as road traffic was thin. A malfunctioning traffic light today causes hours of traffic jams. As the traffic volume rises, cities resort to one-way traffic rules, higher parking fees and other measures to curb traffic in the city centre. Financial markets are similar; regulations need to keep moving to keep pace with the changing face of the market. Has the market changed? Yes, the size of the assets under management by the three large parts of the retail financial market—mutual funds (only retail), life insurance and the National Pension System (NPS)—crossed Rs34 trillion in FY 2017, up from Rs22 trillion just 3 years ago. Both the volume of money and the number of people on-boarding these products has risen sharply over the past few years. The share of household savings in financial products has been rising and now more than one-third of household savings find their way into financial products. In addition to the urban users of these products, a new category of investors are getting added through the Jan Dhan accounts. These are people who will be first-time users of many financial products as they move from cash, gold and real estate.
The year 2017 was marked by four distinct money events. One, it was the year in which systematic investment plans (SIPs) in mutual funds became a household name, leading to a fat pipeline of over Rs5,000 crore a month (that’s Rs60,000 crore a year) flowing from households to equity funds. Two, 2017 was the year in which investors finally gave up waiting for real estate to recover. Despite the bravado of the builder, broker and banker on the future of real estate, the math just did not add up to support prices that are still very high. Why would you invest in something that yields less than a bank deposit after taxes? Renting clearly was the winner over buying. Three, gold and bank deposits lost their sheen as prices dipped and rates fell. Four, risk-averse investors, who feared mutual funds because of their risk, went all out on crypto-money—not just bitcoin, other cryptocurrencies were also on the investment radar, as were non-regulated initial coin offerings (ICOs). What lies ahead in 2018 for your money? The answer in one line is: a continuation of the 2017 trends.
ICICI Prudential Mutual Fund’s new fund offer (NFO) of Bharat 22 exchange traded fund (ETF) is in the market this week seeking investor money for the government’s disinvestment programme. Looking through the document, I was struck with the expense ratio of this fund. At 0.0095% per year, this is the cheapest ETF in the market today. Understand what this cost means first. The expense ratio describes the price you pay for the facility of handing your money over to a fund manager and it is charged on your funds under management. For example, a Rs10 lakh corpus, with an expense ratio of 1%, will cost you Rs10,000 a year. You don’t have to cut a cheque for this cost since it is taken by the fund house out of your corpus—that’s why it is called net asset value, it is ‘net’ of costs. Expense ratios have a big impact on investor returns over a lifetime of investing. At 0.0095%, Bharat 22 will cost you Rs95 a year. Reliance AMC’s CPSE ETF (the first government disinvestment fund) costs 0.07% or Rs700 a year. A 2% managed fund expense ratio costs you Rs20,000 a year.
Why Indian households remain in financial behaviour that is ‘regressive’ is a question that has wrinkled the brows of many a policy maker. ‘Regressive’ behaviour is the over-exposure of Indian households to cash, gold and real estate instead of financial assets. This behaviour includes a reliance on the moneylender for debt, rather than the formal financial system, and the use of ex-post borrowings to deal with medical and other emergencies rather than purchasing an insurance contract. With the mandate of the Reserve Bank of India (RBI), the Tarun Ramadorai committee set out to find answers to some of these questions in 2016. While other committees have looked at the same issue of the strange behaviour of Indian households from the supply side and found serious problems in the way formal markets have been set up, the Ramadorai Committee was asked to look at the problem from the demand side and provide solutions to it. In short, the committee found (read the report here: bit.ly/2iC3GKU) that Indian households are indeed globally unique in their financial behaviour. Not only do they rely heavily on gold and real estate, they are under-insured, have very little pension corpus build-up, take home mortgages much later in life than their mature-market counterparts, and walk into retirement still carrying the burden of debt on their heads.
If in the 1950s somebody wrote a future finance story about India, they may not have predicted the market that faces a retail consumer today. Till the 1990s, your savings and investing decisions were dependent on the government. No wonder Indian households chose gold and real estate as saving sumps. The financial sector was a reflection of the overall direction of the economy. Costs were high, service poor in state-owned and run finance. But post 1991, change came suddenly to finance and this column maps some of those changes as India celebrates 70 years of political and 26 years of economic freedom.
Low Risk High Return Buy 5000 SHARES Of xxxx CMP Rs 7.80 TGT Rs 15 SL Rs 7.70 . Stock Raise Non Stop Till Diwali.” Over the past few weeks some of us would have got messages pushing this one stock.
As markets keep moving up, the frenzied calls and SMS texts that push up a particular stock increase in frequency. I don’t get emails or WhatsApp messages pitching stocks—just calls and SMSes. Some of the callers are really aggressive. Push back at them and they start snarling. Obviously they’re sitting on very steep customer acquisition targets. But we know from past experience that any kind of frenzy usually ends badly. If you gave into the frenzy of real estate a few years back, you’re looking at a nominal erosion of 30-40% of the price you paid. An inflation- and mortgage-cost-adjusted loss will be closer to 50-60%. Frenzies are unsettling. You lose your equilibrium. You get pushed into doing things that you normally won’t do. If you find yourself thinking of suddenly moving money into one stock or one mid-cap mutual fund on a tip, you know you’ve succumbed to the frenzy. Otherwise I’m-safe-in-an-FD (fixed deposit) people are suddenly discovering their risk appetite and want to invest right away on a tip.