The India investment story is currently attracting significant interest from overseas investors. At a recent investor conference, over a third of the investors were first-timers, looking at allocating a part of their global pool of funds to India, while some of the old India hands had the “We’ve seen it all before” look.
There are two schools of thought on our equity markets. The first says Indian markets have traditionally been range-bound and any moves up are inevitably followed by equal and disconcerting moves downwards. Optimism about economic and political prospects is almost always followed by a letdown, either due to a scam, political developments, geopolitical problems, bad monsoons, etc. This school believes the current market peak has a lot of under-priced risks, such as interest rate increases in the US, which could suck liquidity from the international markets, leading to FII flows returning or lessening. Or a sudden China slowdown, or the new government not being able to deliver, etc. The other view says India is now on a fundamentally different growth path. Annual growth of 6% is no longer good enough, Indian P/E (price/earnings) multiples are falling, as corporate profit growth remains strong. Over the past decade and a half, India has had various governments and each one is/was committed to growth. The Left parties are supporting all the right policies in Bengal and their opposition at the Centre is only cosmetic, Indian corporates are learning to compete in a globalised environment and so on. So, the Indian market is set for a breakout from its trading band of 3,000 to 6,500, much like the US Dow Jones index moved from 3,500 to 10,000 between 1995 and 2000.
It is hard to determine exactly where we are at this juncture and those wanting insightful answers will be disappointed! If you are an optimist about the Indian economy (which I am), then you have to necessarily agree with the secular breakout story. But if you are a market perma bear (I am, too), you can find several reasons why things could go wrong, not the least of it being our market history and the gloomy mutterings of sceptics.
The reality is that the market is dependent more and more on foreign inflows of money. The stock of FII money in India now is over $30 billion. This is very comparable to the total amount held in Indian domestic mutual funds which is about $35 billion. However, the equity in Indian mutual funds is actually less than 20% of total assets under management, or about $6 billion. The Indian stock market has a capitalisation of about $300 billion of which the floating stock is less than a third, or about $90 billion. This means foreign funds now account for about a third of the Indian floating stock and a much larger part of the trading volumes, given that Indian’s generally have a buy-and-hold mentality.
• Economic benefits of India’s growth are increasingly going into foreign hands
• The Indian market is set for a secular break-out from its trading band
This also implies that increasingly, the economic benefits of India’s growth are going into the hands of foreigners. In principle, if they are smart enough to recognise India’s prospects and are willing to take the risks that go along with such investments, then they deserve to benefit from it. But ultimately, Indians need to benefit from India’s economic growth as well. This is not to say that we should impose any sort of restrictions on overseas money, because we do need capital for India’s growth and development needs. What it does mean, however, is that the government and regulatory authorities need to incentivise Indians to save more. The twin benefits of that would be that more money would come into the capital markets to fund productive enterprise and thereby lead to faster growth and development, and Indians would retain a higher share of India’s growth benefit.
This implies that asset gathering from the Indian public in the form of pension funds, insurance, mutual funds, deposits, etc. needs to be speeded up and the sooner the government can put in place policies that allow this to happen, the better from the long-term perspective of the Indian public. Indian households have one of the lowest savings rates in Asia and an even lower proportion of those savings are invested in stock markets. Therefore, unless we Indians divert a greater proportion of our savings into productive instruments, we will miss the opportunity in our own backyard.