The Indian equities rush and 'missing' retail investors
Puneetkumar Pattar 11 June 2014

Do not invest because someone tells you that markets will rally and you will mint money. See equities as a long term wealth building opportunity rather than a short term cash cow

Every Indian who has seen the stock markets rally over the past six months, but didn't invest, is definitely upset over missing this great opportunity to make money. In fact, Indian stocks were not even seen as a serious investment about nine to 10 months ago. There were all kinds of difficulties experts spoke about, that include low growth rates, high inflation, high fiscal deficit, a depreciating rupee, no confidence in the Government and so on. Today, despite equities gaining aggressively and trading at the higher end of valuation parameters, there are experts out there who say that this is the 'once in a lifetime opportunity' to buy Indian equities. So what has changed in the past six months that has turned what was not even seen as an opportunity into Gold?


The Sensex has risen from about 18,000 in August 2013 to 25,000 in May 2014, around 40% in eight months. Stock markets are said to be reflectors or indicators of hope in the economy and that is true, there is definitely a great pick up of hope. Several stocks in the infrastructure, capital goods, manufacturing, oil & gas and power segments that were not even seen as prospective investment bets have now turned into the most attractive stocks. Take examples of IRB Infrastructure, Sadbhav Engineering, IL&FS, DLF, BHEL, Coal India, JP Power, Reliance Industries Ltd (RIL), ONGC, and Indian Oil. All these stocks have more than doubled in the last 6 months. One can call these speculative moves. However, when you look at public sectors banks like Canara Bank, Bank of India, Corporation Bank, or for that matter the State Bank of India (SBI) itself, they have rallied by 60%-70% in the past two-three months. Not long ago, experts were apprehensive of a price-to-book multiple of one in SBI, quoting their doubts on bad debts, and today we see strong advices on investing into the country's largest lender even when it trades at two times its book value.


There is a definite desperation to bring the retail investor back into the stock markets. This reminds me of 2007, when the stock markets hit all time highs and there was a euphoria across the nation. Just then, Anil Ambani's Reliance Power entered the markets and its initial public offering (IPO) was a super hit. People queued up to open demat accounts and invest in this company. Even those days, news articles, advisers, and experts set massive targets and said that it was a lifetime opportunity for retail investors to buy stocks. The stock market indices were already at their lifetime high then. An article on targeted the Sensex to hit 27,000 in 2008, another said Sensex will hit 100,000 in 15 years, Morgan Stanley said it would cross 50,000 by 2018 and JP Morgan said that it would hit 30,000 by 2013. We all know what happened after that in 2008 and how the retail investors who entered the stock markets lost money. There could be some investors who held on to their investments and made money, or at least be at the break-even point but a large number of them booked losses.


Now, we are in a similar situation again. The Sensex is trading at a lifetime high and the experts are saying that this is the best opportunity for the retail investors to get into the markets. Two months ago, Deutsche Bank saw the Sensex at 24,000 by the end of 2014, but now, they project it will touch 28,000, Goldman Sachs projects the Sensex will hit 28,000 by end of 2014, Karvy sees it at 100,000 by 2020, Ambit Capital sees it at 30,000 in FY15, BoFA-ML sees it at 27,000 by end of 2014, Edelweiss says 29,000, and so on. How different is 2014 from 2008?


When the Sensex hit an all time high in 2007, it traded at a price-to-earning (PE) of 25 times. In January 2008, the Sensex hit 20,800, its all time high then, and traded at 26 times its earnings. Unfortunately, after that, things went haywire and by January 2009, the Sensex was trading at about 9,000 levels, at 12 times earnings. Soon, the stock markets picked up and the Sensex was again trading at 20 times earnings during 2010 and 2011. However, in 2012 and 2013, the Sensex consistently traded at 17-18 times earnings. Today, at 25,000, the Sensex is trading at 18.5 times earnings. Thus, it is clear that we are not seeing an overvalued situation like in 2008, where it traded at more than 25 times earnings. Moreover, in 2008, the world was also on the verge of witnessing the US mortgage crisis followed by the global financial meltdown, which hit investor sentiments.

But then, it may be interesting to note that the retail investor is not showing much interest in the stock markets despite a desperate attempt by brokerages, mutual funds and other financial firms dealing in equity markets to attract them. May be the retail investor has not recovered from 2008. In fact, even when the Government of India launched the Rajiv Gandhi Equity Savings Scheme (RGESS), there was a muted response despite the fact that the investor was promised taxation benefits. Its a different story that whoever did invest under this option would have minted money in the last one year. There is absolutely no doubt that the retail investor is keeping a watch on all this but is still not ready to take that the  plunge. Companies will have to ponder what is keeping them away.


One point definitely is that savers and common investors do not understand the functioning of equity markets and how or why or what makes the prices of stocks move. That is the major reason why investors and savers have stayed away from getting into equity investments. Even mutual fund investments have been dull for the last five years. The average assets under management (AUM) have remained at around Rs7 lakh crore for a long period, except the appreciation that we have seen recently. India has a abysmal retail participation in equity markets. However, there is a huge opportunity here, and none of the companies have been able to crack it. Even if 1% of our population (12 million) invest Rs1 lakh each in the stock markets, that will be Rs1.2 lakh crore. This makes good for the total foreign institutional investor (FII) inflows in the Indian markets for 2013.


So all considered, what do we do now? I would stick to the standard answer that has held good across ages and economic cycles. Do not invest because you are seeing the markets go up or down. Do not invest because someone tells you that the markets will run and you will mint money. Do not invest because you are desperate to join the rally. Spend time, read books, go through content on equities, economy and related pieces, learn and explore more, get an understanding, and then, take the call. Equities have undoubtedly outperformed almost every asset class in the long run. Most often, we spot gold only after it glitters. After all, that itself is its prime feature. So, do not try to jump the bandwagon or time the markets. Markets are always full of opportunities. That is exactly why they are termed markets. See equities as a long term wealth building opportunity rather than a short term cash cow. Take your investment decisions on your own. You are the best fund manager your money can have.

k m rao
8 years ago
After a long time I have read a sensible article on the subject. Till now every "expert" used to lament how we the common investors are losing " a great opportunity" in stocks market and starts sermonizing on power compounding, SIP etc. For the first time, I have seen someone who did not indulge in sermons. However I beg to defer with the author on his point that the retail investor does not understand the working of equity markets. I don't say I understood the markets. But some of the reasons why I don't invest or advise anyone else to invest in stocks are (i) the euphoria about stocks is only created by vested interests (financial analysts, business channels, news papers etc)for their business (ii) common investor is the loser for most of the time (iii) the so called technical analyses and other jargon is nothing but star gazing or counting crows on a tree (iv)the information disclosed by the companies need not be correct (Sathyam is an example) and SEBI can do nothing (It does not give me solace if Ramalingaraju is punished and I lose all my money) (v)markets are influenced by hawala money and above all (vi) when I have a number of other safe avenues where our capital is 100% protected and give me a minimum of 10% to 12% return, why should I ever come to stock market where there are only sharks waiting to loot my hard earned money ?. If these simple things are understood, it will be clear why Indian common investor will never touch stocks even with a barge pole.
Replied to k m rao comment 8 years ago
Dear Mr. Rao,
There are always two sides to a remark. On the other side there has been wealth creation for umpteen people, over several years, all over the world and in India.
Dear Mr K M Rao,
Please do things sensibly using your own mind and with reasonable, controlled greed and without fear so that you do not need to blame a system or person or broker and I think one improves his financial wealth over time. Not everything is for you. Select your boundaries and enjoy the fruits.
k m rao
Replied to JIGNESH Dosshi comment 8 years ago
Let us assume for argument sake that your statement "there has been wealth creation for umpteen people.." is correct. If this is true, then why should the financial institutions both public & private undertake the "unenviable" task of educating us, the illiterate fellows. Secondly why FM himself should direct SEBI to do something to bring the retail investors into market? (Kindly note I am not saying anything about what happened / happening in other markets). The sole reason for lack of retail participation in India is not because of lack of understanding of markets but lack of faith in the sense of fairness of markets. We the common folks have seen through the game. We are not ready to be taken for a ride by any one. The number of retail investors speaks volumes about the faith the people of India have in stock markets.
jaideep shirali
8 years ago
The point is Indian investors do not buy good shares when their prices are low. SBI's 52 week low is Rs 1452.9, today it is 2636. L & T's 52 week low is 663, today it is 1666. The average investor does not buy at market bottoms. In a rising market, he waits and waits to enter till markets peak. He then buys and the market crashes shortly thereafter, so he burns his fingers and goes back to deposits. When markets fall, good companies do not fold up, nor does the economy. We must try to buy when markets are low and then hold on. Only equities beat inflation in the long run. Yet, a good portfolio must have not just equities, but bonds and other instruments to diversify the risk.
ch prakash
8 years ago
I am keen reader of Moneylife magazine for the last five years. Moneylife always insists on timing the market. In the recent issue, they have observed the long term trend is up. Therefore, I feet it is the right time to start investing and it is better to invest through well managed Mutual Fund recommended by Moneylife. Otherwise, people will become mute spectators and will be left out of making wealth.
Dinesh jain
8 years ago
wow, such a difficult subject explained in a layman language.

keep it up...
Narendra Doshi
8 years ago
Well summarized. Pl remember each word & implement the last paragraph contents.
8 years ago
Understanding the market is very, very difficult as they are driven not only by fundamentals but also by sentiments- and no one can be sure which way sentiments turn up.
When I see a stock, its price and its financials and prospects, what I'm not sure is that whether the good or bad things are already reflecting in the shareprice. Perhaps a peer group review of P/E ratio is required- but how many people know about it? :-)
k m rao
Replied to Abhishek comment 8 years ago
Who has the time for it Sir?
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