Will this increase retail participation? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will this increase retail participation? 

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In this issue:
» China's shadow banking woes.
» Will 2014 see the turnaround of the auto sector?
» Dr. Rajan: High MSPs are impacting inflation in India.
» Is the US economy back on its growth path?
» and more....

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It wouldn't be wrong in saying that majority of retail investors invest in equities in hopes of making supernormal gains in a short span. This is a perception that needs a major overhaul, in our view.

Wealth creation is everyone's ultimate goal. But we believe there are no shortcuts in doing so. It is a slow and steady process that one must follow. For investors to make their money work for them over the long term, few attributes are required. These include patience, discipline and basic understanding of finance. Have good control over these and you can make your money work well for you over longer periods. Unless and until peoples' perceptions do not change to such a manner, their expectations from the equity markets will remain high, and so will their disappointment levels. And this will make them stay away from equities all the more.

In an interesting article in the Hindu Business Line, the author discussed why the efforts of the government are not doing enough to bring retail investors back to the markets in recent times. Despite investor awareness programs informing and educating the public about the inflation beating tendencies of equities, it has not done much to change perceptions of investors. The author also touched upon the lack of exciting businesses - such as social media, mobile handsets, or coffee shops - being listed on the stock exchanges. And that more addition of such firms will allow the new, young investors to buy into companies that they can relate to. Finally, the author also made a point that young startups should be persuaded to tap primary markets and that the regulatory hurdles should be reduced to allow the same.

While we partly agree with the last point made by the author, we are of the view that such a step could also further dissuade investors from investing in equities over the long run. This we say because of the possible risks attached to investing in new, young companies involved in 'exciting' businesses with new models and unproven track records. How many of such ventures will turn out to be successful, sustainable ventures over the long run is be something that will be difficult to gauge.

This brings us to the age old argument of where to invest: Exciting or boring businesses. Sure, investing in a company that is into the exciting space of social media or coffee shops would allow investors to take the Peter Lynch approach to investing - i.e. of buying something you know. But if history has taught us anything, it is that such hypes or excitements are short lived. And that eventually, the quality of the business and its earnings is what would eventually drive share prices. Proven age old businesses with strong models and strong financial track records would be relatively safe bets against taking a guess as to which business venture will survive or die out.

In our view, increasing awareness towards such aspects of investing should be the area of focus. These attempts to increase retail investor trust and participation is a better approach according to us. So, to conclude, we would like to reiterate: Equities have the tendencies to beat inflation over the long term, especially when compared to other asset classes. This is something that should not be forgotten. Especially for the purpose of wealth creation!

'Do you prefer investing in new exciting businesses or old boring businesses? Share your views in the in the Equitymaster Club. Or post your comments below.

01:25  Chart of the day
India is an agrarian economy. Hence, agricultural jobs should obviously command a higher share in India's overall employment structure. However, over the last decade something counter-intuitive seems to be happening. The share of agricultural jobs seems to have gone down from 60% in 1999-00 to about 49% in 2011-12. Guaranteed employment opportunity schemes are a primary reason for this. Such schemes have led to re-location of farm labor to other sectors. This has led to shortage of farm labor. And rising wage inflation elsewhere. Further, food prices have also spiralled. That's because farm productivity has been impacted due to shortages of labor. In effect, exit of unskilled labor from farm sector to other sectors like services should boost the productivity of the nation. But this is not happening. As can be seen in today's chart, the share of services sector in India's employment structure has hardly changed. The farm labor has effectively moved into construction sector. And this change will do little to increase the nation's productivity.

Trend in Indian employment over the years
* excluding construction

Looks like everyone's out to prove that China is going to be the next big tremor to rock the boat that is the world economy. And the origin point of choice for nearly all of them is the country's shadow banking system. Take this latest article on Bloomberg for example. It talks about how a credit risk measuring metric is hitting new highs perhaps indicating that credit risk and leverage have reached levels in China that are not sustainable. And the worst part is that the shadow banking system is out of reach of the conventional central bank policies as most of it is underground. So even if the Chinese central bank were to take some measures to curb the risk, there's no guarantee that the risk will go away. Besides, the measures that have so far been taken are very tiny compared to the size of the economy. Consequently, there's a great deal of uncertainty out there. One way to deal with this is to closely monitor which way US treasuries head. If they go higher, then there's flight to quality for sure; which in turn would mean further worsening of the Chinese situation.

This is one statistic that Indian automakers will be hopeful about. As per an article on Bloomberg, passenger vehicle sales have risen in each of the three fiscal years when elections took place. This is in the years 1999, 2004 and 2009. Does that mean that we are in for a recovery in the auto sector in 2014? Could be likely. The Indian auto industry has probably been facing one of its worst slumps ever as a combination of economic slowdown, lack of reforms, sluggish industrial activity and an ineffective government have all taken its toll on demand. But most of the auto players agree that the average Indian consumer is adopting the wait and watch policy as a result of which there is this huge pent up demand.

Once the new government comes into power, there are hopes that a new agenda will set the pace for an economic recovery and thereby a ramp up in auto volumes. Indeed, most of the new models are also expected to be launched in the market post the elections. It will be interesting to see whether economic recovery will really surge post the general elections. Skeptics opine that the possibility of no single party gaining majority cannot be ruled out. And forming coalition with regional parties will lead to several reforms getting delayed. However, for the time being a recovery in the auto sector pre elections does look quite difficult.

What's common between rising divorce rates, increase in attrition rates, higher consumer debt and declining college admissions? Most people would probably say that these are all negative social indicators. That could probably be true from a sociology point of view. But wear the hat of an economist and you will see these factors as signs of economic recovery. We came across an interesting article in Yahoo Finance that uses these social parameters to draw attention to the changes in the US economy.

As you know, the US economy was in steep recession between 2007 and 2009. During that period, divorce rates declined to hit a 40-year low. Many kids moved back with their parents. People held on to their jobs as new jobs became scarce. All these factors were deeply impacted by the adverse changes in the economy then.

But now, things seem to be changing once again. Divorce rates in the US started going up as soon as unemployment rates began to decline. The proportion of people quitting their jobs too has gone up. Household debt jumped to US$ 241 bn in the last quarter of 2013, the highest level since 2007. All these factors reflect people's improving confidence in their future economic prospects, and in turn, the prospects of the overall economy.

Does this mean the US economy is back on its growth path? We're not too sure. We believe that the so-called recovery is a result of the artificial financial distortion in the form of the unprecedented monetary easing. It may have created a temporary wealth effect by pushing up asset prices. But once the real market forces prevail, sooner or later, the ongoing party would come to a disastrous end.

The UP government has claimed time and again that the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme has been its biggest victory. And that putting more money in the hands of rural populace has solved India's poverty problem to a great extent. However, it comes as no surprise that the only independent government institution disagrees with the merits of MGNREGA. Dr Raghuram Rajan, governor of RBI, has once again defended his anti-inflationary stance. And this time, in doing so, has blamed the MGNREGA for rural inflation. As per Economic Times, Rajan has argued that high minimum support prices for crops could be working against lower prices. That the RBI's anti inflation stance has been an eye sore for the Finance Ministry is well known. Also several ex-RBI governors have criticized the government's lack of reform initiatives. However, this is probably the first time that a RBI governor has pin pointed an ill conceived policy. For investors, this would mean that the RBI governor and government may agree to disagree, unless and until one of them changes.

The Indian equity markets remained buoyant in the post noon trading session. At the time of writing, the benchmark BSE-Sensex was up by 60 points (+0.3%). Pharma, capital goods and metal stocks were the biggest gainers. Majority of the Asian indices, barring Japan, were trading firm led by China and Indonesia.

04:55  Today's investing mantra
"Investors repeatedly jump ship on a good strategy just because it hasn't worked so well lately, and, almost invariably, abandon it at precisely the wrong time."- David Dreman
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3 Responses to "Will this increase retail participation?"

Rajeev Mathur

Feb 28, 2014

the excitement of getting good returns on investment is important. it does not matter whether the business which gives such returns is exciting, dull or super dull. what matters is the returns it generates.


Kamal Garg

Feb 28, 2014

It has always been a dilemma for most investors including the savvy ones also. While it tempting to invest in a new technology start-up which promises a thousand times return on your investment (because of the nature of new-tech start-up) but at the same times suffers a very high risk of investment going awry as has been experienced time and again during dot com boom/bubble of 2000, etc. In my opinion, let PE/VC firms invest in such start-ups and let the general public or general investors enter when the business has reached to a stage of attaining critical mass - as this will reduce the risk. Technology can be replicated very easily without much cost - what cannot be replicated is product innovation, customer loyalty, reach , penetration and customer satisfaction.


Swapnil Gangele

Feb 28, 2014

First of all to strike back all long term given suggestion in this article I asked why a well diversified professionally chosen portfolio known as SENSEX shying 21k figure even after 7 yrs its first affair. Isn't 7 yrs a justified long term,or isn't it diversified well or is there lack of management or some other jugglery of words. Dear author of this article no modern concept, old company , training could attract retail investor when they could have stress free returns in conventional products in the same time there is high need to bring economy in track first and next retail investor can't adopt active investment strategy so it's not their game which lost by even professionals

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