The share of equities in the household balance sheet ( $11 trillion) has gone up to 4.8 per cent in March 2022, as against 4.3 per cent in March 2021 and 2.7 per cent in March 2020, as retail investors stepped up stock market investments through mutual funds and direct purchases.
Indian household asset holdings — based on savings data and MTM (mark-to-market) calculations — over the last 15 years suggests that equities as a percentage of households (HH) net worth have risen to an all-time high, according to a report from research firm Jefferies. The domestic investment in equities is through multiple means with the primary vehicle remaining inflows into mutual funds (MFs). Over the last 5 years, equity MFs have seen inflows of around $80 billion — over Rs 6 lakh crore — and this trend appears consistent and hence sustainable, Jefferies said. “Retail investors also invest in equities via channels including direct stock purchase and through insurance (primarily ULIPs) and pension funds ($6 bn per year, EPFO and NPS),” it added.
The strength of domestic buying has risen gradually since 2014. Retail flows can sustain as households save $700 billion annually and equity flows are just 5 per cent of annual savings. While market correction due to rate hikes and premium valuations remain a risk, domestic buying should likely smoothen declines, the report said. The rise in equities in household assets coincided with the buoyancy in the stock markets. The Nifty Index has grown 11 per cent over the last 12 months, despite foreign selling of $28 billion in the secondary market, thanks to the strong domestic buying.
Jefferies said financial savings are 36 per cent of the $11-trillion plus balance sheet. “The preferred mode of investments within financials remains bank deposits (three times of equities). Physical assets like property (49 per cent) and gold (15 per cent) are still dominant. However, physical assets have lost about 8 percentage point share to financial savings since the trend began in 2014,” the research report said. Further, Indian households save more than $700 billion annually. A look at national accounts data for FY21 and savings trends for FY22 show that total household savings are trending above Rs 50 trillion, or $700 billion, for the past two years. “While there was a three percentage point jump in savings versus trend, we estimate total household savings as a percentage of GDP in FY22 go back to the pre-Covid level of 23-24 per cent,” Jefferies said.
The Indian market performance over the last 12 months looks even more stark considering the strong and consistent foreign portfolio investor (FPI) outflows. Over the trailing 12 months, FPIs have net sold $28 billion in the secondary markets. This represents around 5 per cent selling of their March 2021 holdings.
Jefferies said valuation is still a concern with rate hikes expected. Nifty has recovered 8.7 per cent from its recent lows. On valuation parameters, the market still doesn’t offer attractive entry points.
“One-year forward PE of 19.5 times is 17 per cent above the 10-year average. On a yield gap basis, the market trades 53 bps above the historical average. Moreover, the rate hike cycle and sharp inflationary spike in commodities suggests the earnings upgrade cycle has likely ended for now. The domestic flows support could then help the Nifty move sideways, warranting a time correction rather than deep cuts,” it said.