X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Markets: What the 'long-term' has in store? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Oct 26, 2007

    Markets: What the 'long-term' has in store?

    In a move to slam brakes on the flows of anonymous foreign capital, the Securities and Exchange Board of India (SEBI) proposed a number of restrictions that will effectively spell doom for the thriving participatory note (PN) activity in the stock market. While the gyration of the benchmark indices on the bourses in response to this development was well anticipated, what we failed to reckon is the necessity of retail investors to panic in such situations.

    The fact that we are uncomfortable with the BSE-Sensex moving up to 19,000 levels and are not particularly jubilant at stocks meeting their three-year target prices at an unusually feverish pace has been adequately cited by us in the past. What we herein wish to explain is the rationale as to why keeping one's serenity at such times, yields favourable results in the longer term.

    Current investment scenario
    A noteworthy feature of the ongoing structural transformation of the Indian economy is the significant increase in domestic saving and investment rates. Domestic investment rate increased from 24.3% in FY01 to 33.8% in FY07 and domestic saving rate from 23.7% in FY01 to 32.4% during FY07. The household sector continued to be the major contributor to gross domestic saving with its saving rate placed at 22.3% in FY07, while on account of rise in profit, the saving rate of private corporate sector rose to 8.1% in this fiscal. The public sector, which started posting positive saving beginning FY04, recorded a saving rate of 2.0% in FY07 on account of continuing fiscal improvement as against a negative saving rate of 1.7% in FY01. However, it may be noted that over 95% of investment is financed by domestic savings.

    Given the fact that Indian per capita income is increasing rapidly and policy efforts towards financial deepening for achieving a more inclusive growth are underway, savings rate in India could even rise further in the medium to long term. It is also expected that the level of saving rates should help continue to finance the investment needs of the economy domestically, without undue dependence on foreign savings. But more importantly, one needs to look at the composition of such investments rather than just at the larger picture. Despite having one of the most advanced systems in place for trading in equities, Indians invested barely 6.2% of their total corpus in equity and equity-related instruments (mutual funds) in FY07.

    Exposure to equities
    At the end of June 2007, demat accounts with premier depository National Securities Depository Ltd (NSDL) stood at 8 m while that the other depository Central Depository Services Ltd (CDSL) was 2.3 m accounts, making the total demat accounts in the country at over 10 m (0.003% of the population living in urban areas). Further, there are over 1.1 m account holders with NSDL who own shares in their accounts but yet to activate their accounts following the PAN requirement.

    Despite the fact that financial services accounted for nearly 14% of the country's GDP in FY07, equities and mutual funds formed barely 1.2% of the GDP (at market prices) in FY07. As against this fixed income securities such as bank FDs, PPF and pension funds formed a sizeable 11.9% of the GDP.

    Penetration issues
    The fact that the lending rates moved to considerably lower range in the past decade (despite the recent hardening) led to higher incremental demand for credit (incremental credit deposit ratio was over 100% in FY06 and over 90% in FY07), which in turn impacted the penetration levels. To put things in perspective, while 70% of the total bank credit was lent at rates between 14% and 18% per annum in FY01, less than 10% of the bank assets are locked at such high rates today. However, the penetration statistics reveal a different story if you look at the per capita accessibility of credit. Despite the credit growth in FY06 and FY07 being robust for banks, the same merely helped the growth in per capita distribution of credit rather than credit per branch. Although the historical trend shows a direct association between the two variables, they have moved in tangential directions over the last two fiscals. This implicates that there has been credit concentration rather than penetration. The same holds true for exposure to equities, which having increased in absolute terms, have nonetheless, remained concentrated in a few hands.

    Existing low penetration levels, increasing affordability of credit and rising income levels have led to a growing demand for retail financial products, leaving India with a substantial retail investor base having a large pool of untapped surplus funds. The same, we believe has the potential to replace the 'anonymous foreign capital' (through P notes), in case the latter chose to take a flight back to their source destinations.

     

     

    Equitymaster requests your view! Post a comment on "Markets: What the 'long-term' has in store?". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Which Gods Will Bring Down the US Empire? (Vivek Kaul's Diary)

    Aug 17, 2017

    Mr Trump is in the White House and the gods are in their heavens; what's not to like?

    Will They Haul Off Trump's Statue, Too? (Vivek Kaul's Diary)

    Aug 16, 2017

    All across the country, the old gods become devils. New, gluten-free gods take their places...

    This Company Beat the Business World's 'Three Killer Cs' (The 5 Minute Wrapup)

    Aug 16, 2017

    And what it has in common with beating the stock market too.

    5 Steps To Become Financially Independent (Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 17, 2017 01:29 PM

    MARKET STATS