Have retail investors missed the bus? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Have retail investors missed the bus? 

A  A  A
In this issue:
» Roubini: There's a bubble brewing.
» McKinsey expects consolidation amongst the world's biggest banks.
» Krugman: Fate of US and UK not the same as Greece.
» Telecom Commission ups spectrum prices.
» ....and more

Retail participation in equities has declined significantly in recent times. But with the BSE-Sensex moving reaching its all time high figure, it does raise one question. Have retail investors missed the bus?

As per the Economic Times, retail holding in Nifty companies averaged to about 7% during the quarter ended September 2013. This is the lowest figure in about two and a half years.

A couple of days ago, Prashant Jain of HDFC Asset Management Company shared his views on this subject. In a discussion with the business daily, Mr. Jain stated that retail investors' participation in Indian markets is puzzling. This he says because investors tend to put in money only when the markets are rising and expensive. And that sentiments towards are equities are quite the opposite in comparison to other asset classes; wherein investors tend to put in money when the prices fall.

It would be fair to say that the Indian markets have not been too expensive in recent times. In fact, the BSE-Sensex is trading close to 18 times its trailing twelve month earnings. This is close to its long term average number.

Thus, with these kinds of valuations, there is hardly any reason for retail investors to press the panic button and exit. To be fair to them the current economic environment does not really inspire confidence in the country's stock market. For there are far too many concerns that seem to be currently impacting growth. While Mr. Jain too shares this view, he believes that the worst is possibly behind us.

'In my opinion, we are at the juncture presently where a lot of pain has been absorbed, where a lot of corrective actions have been taken and the results will show over the next few quarters.' he said. Sharing similar views to those of Mr. Jain, Montek Singh Ahluwalia, the Planning panel Deputy, expects economic growth to improve during the second half of the year. His reasoning is the pickup in activity in the core sector.

But is the worst really behind us as these gentlemen are arguing? Well, as far as we are concerned, we are not that sanguine. You see, long term, it is the policy measures and the reforms that really take a nation on a higher growth path. And unless we see clear signs of the same emerging, we don't think India will really be able to come out of its mediocre growth trap.

Consequently, while valuations could be attractive, it is important that we don't set our expectations too high at least until clear reforms are in place. Besides, we also need to make sure that we invest only in the best quality stocks and not the ones that depend a lot on the Government taking the right steps.

Is this a good time for retail investors to be investing into equities? Let us know your comments or post them on our Facebook page / Google+ page

01:45  Chart of the day
Samsung leads India's smart phone market with one-third market share. Home grown brands Micromax and Karbonn hold the silver and bronze positions with shares of about 21% and 10% respectively. Global majors Sony, Nokia and Apple rank fourth, fifth and sixth respectively. All these numbers are for the quarter ended September 2013.

India's smartphone market share in 3Q2013

Today's chart of the day is more to do how a company can lose its competitive advantage. It is well known that until a few years ago, Nokia ruled the mobile phone market in India. Fast forward to today and its share in the smart phone category stands at about 4%. Now, this was a company that had the early mover advantage, a very strong brand name, as well as good quality products at the time. But, since it was not been able to keep up with its competition, none of these so called 'moats' have helped it maintain an advantage over competition! This is thus a good example of how good products or brand names are not sufficient to provide companies with sustainable advantages.

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We have time and again highlighted that policy makers in the developed economies have responded very recklessly to the ongoing economic crisis. Renowned economist Nouriel Roubini provides a clear view of what has happened. The US central bank has resorted to ultra-easy monetary policy in the form of near-zero interest rates and unprecedented bond purchases. But despite such large doses of cheap credit, the economy is showing no signs of revival. Unemployment levels too continue to remain high. The central bank was hoping that the easy credit would prop up private consumption and investments. But has that happened? Not really... Instead banks have been hoarding cash in the form of idle excess reserves. On the other hand, there has been a significant slump in credit demand due to muted economic growth and high levels of household debt.

Then where is all the excess credit going? The flood of liquidity is being channelised into higher-yielding risky assets. This is the reason why we are seeing a wide discrepancy between the global economic fundamentals and asset prices. It would not be surprising to see a financial crisis of a much larger magnitude than the previous one once this bubble reaches its zenith.

Banks were the worst sufferers of the global financial crisis and many of the major ones were compelled to go to the government with a begging bowl. Since then, governments in the developed world have been gunning for more regulation and adequacy of capital. The weak global environment is not helping matters either. And so as per a report by McKinsey, it is expected that one-fifth of the world's biggest banks may be either broken up or sold. This is with the aim of becoming leaner and also improving shareholder returns. Indeed, it won't be surprising if the number of global universal banks drop to fewer than 10 from about 25 currently.

The minimum return required by shareholders is about 10-12%. And return on equity of global banks is still below this mark. Having said that, returns have been inching up. Basically, the McKinsey report states that banks will rely on one of the five strategies to ramp up performance. One of these includes the 'back-to-basics' model that will focus on lower costs and fewer products. Whatever the case, global banks can no longer afford to go back to those days before the crisis when recklessness and greed was the norm. Those focusing on the good, steady and boring banking business will be able to tide over the storm much better.

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For the past few years, investors invested in the telecom sector were witnessing only one thing - pain. Intense competition and the subsequent price war weighed on the margins of every telecom operator. On top of this, the regulatory requirements and government's seeming need to squeeze every rupee from the operators further stretched the balance sheets. Therefore the recommendation by the regulator TRAI to slash the reserve price for the upcoming spectrum auction was a breather for the sector. However, the Telecom commission has put a dampener on this. It has proposed to hike the rates for the 1800 MHz band by around 15% over what TRAI had suggested. For the 900 MHz band the rates have been hiked by around 25%. This means that for those operators who hoping to get the spectrum at lower rates, will have to cut short their party. But even with this increase, the rates would be lower than what they were in the previous auction round.

The Commission has also come up with a new policy on mergers & acquisitions. This one states that the maximum market share that an operator can enjoy in a circle after the acquisition would be increased to 50% (from 35% earlier). Though this sounds good on paper, the fine print of the policy is still a deterrent for M&A. The problem is that the policy expects operators to pay the market price of the spectrum that they get through an acquisition. So the question is why not just participate in the auction and get the spectrum instead. Unless such ridiculous ideas are removed, the policy is unlikely to yield any positive results. Hopefully before the policy is finalized, such nuances would be considered and removed.

It's been a while since we heard about Greece. A recent note by Nobel laureate Paul Krugman broke that trend however. Apparently, Krugman is not happy that people expect the same fate of US and UK as Greece. He agrees that these economies are similar to Greece in many ways. They are leveraged, they run high deficits and are facing bad economic times. However, the similarities end there as per Krugman. For he believes that unlike Greece, countries like US have their own central banks. And therefore they can always act as lenders of last resort. Thus, if Greece had its own central bank, it perhaps wouldn't have faced the crisis it is facing now. In fact, as soon as it was found that European Central Bank would step in and help Greece, its problems began to ease and its borrowing costs also came down.

Well, the theory that Krugman has put forth is indeed a very coherent one. But coherence unfortunately does not always translate into accuracy in predictions. Krugman seems to be missing the point that one has to eventually pay the price for keeping debts higher and keeping rates lower than the actual rate of inflation. Policies that intervene in this process - like the central bank interference - just end up delaying the inevitable. In fact, the more the delay the heavier the price economies have to pay. We don't think it would be any different this time around.

In the meanwhile, the Indian markets shed their late morning gains during the post noon trading session. At the time of writing, the BSE-Sensex was down by about 40 points or 0.2%. Stocks from the information technology and metal spaces were in favour today, while selling pressures was seen in stocks from the realty, power and consumer durables sectors. Midcaps and smallcaps were not in favour today as well as the BSE Mid Cap and BSE Small Cap indices were trading lower by about 0.8% each. Stock markets in other parts of Asia ended the day on a weak note with China, Japan and Hong Kong down by about 0.5%, 0.8% and 0.7 respectively.

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8 Responses to "Have retail investors missed the bus?"

Mohan Kumar

Dec 14, 2013

Retail participation is not due to lack of awareness, but due to awareness that lot of artificial, official counterfeit money from various parts of the globe and our own illegal and corrupt money are crowding the market. Otherwise how do you explain the savings proportion in stock markets at a dismal 6% of Bank deposits. Quality of savings of Indians and their awareness is excellent, considering also the governance issues and quality of fund managers.

Like (1)

Dr. Arun Draviam

Nov 8, 2013

I keep insisting at B-Schools in Delhi and Bangalore that American text books on several subjects like Corporate Strategy or Mergers and Acquisitions have little relevance, except for theorizing, in the MBA programme in India. All studies at the MBA programme should be done in the policy context of Indian Government as articulated through the laws on the concerned subject.

Like (1)

Raghuveer Singh Rathore

Nov 8, 2013

If you ask me sincerely, BSE OR NSE & Stock-Exchanges of Equities is nothing but gamble joints, which are approved by Central Govts of the countries involved. Retailers will always have to suffer & suffer & suffer, nothing else.

Like (1)


Nov 7, 2013

Why everyone is waiting for common investors to arrive in stock mkt? Do'nt you think it is similar to expert gamblers of casino waiting for ignorant & innocent fools wandering into casino and volunteering to get looted. Finally, if people like Jhunjhunwala,Chokhani,Damani, etc have earned so much from mkt --then whose money is it anyway?

Like (2)

virendra bapna

Nov 7, 2013

retail investors have taken a very very good decision by not investing in stock markets because they have lost their full hard earned money several times and now they have come to know that only corrupt and manipulators and insiders can make money in stock markets.

Like (2)


Nov 7, 2013

I think retail,investors can still invest but in limited sectors... Metal, pus banks, even private banks, auto stocks are far from their expensive valuations... Broader index still remains weak... Yes a lot of mid caps have recently rallied but from a long term perspective most of them still look extremely attractive

Like (2)


Nov 7, 2013

The way the central govt is running, we all feel that the entire activities looks like chit fund business. Every where uncertainty has been sown to loot the common man. Given the situation we all feel to go for the known method of securing our earnings even if it yield less.

Like (2)

kamlesh Bhatt

Nov 7, 2013

Retail Investors have burnt their fingers a lot. Moreover, retial investors used F & O in grid so ehavily that the damage was beyod their absorption limits resulting into some suicides or borrowing at exrobitant price and loosing the prime assets other than shares. So now, many investors are either extremely afraid or exhausted.

Like (2)
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