Small investors’ market share is getting smaller

[rajanlove]

Small investors are allocating an increasing portion of their savings to stocks, but their holdings as a proportion of the market are being dwarfed by those of company promoters and foreign institutional investors (FIIs).

Still, buoyed by an increase in investment options such as mutual funds and insurance products, retail investors will keep increasing their stock market allocation. This amount will rise from about Rs1 trillion in fiscal 2008 to between Rs3 trillion and Rs5 trillion by 2020, two recent reports by international brokerages said. The reports projected that Indian households will triple their allocation in stocks to 15% of savings by the end of the next decade, from 5% now.
According to data from brokerage CLSA India Ltd and the UK’s financial services firm Noble Group Ltd, retail investors’ direct exposure to stocks rose from 1-2% of their household savings in 2001 to 9.7% in the fiscal year ended 31 March 2008, as they saved more, helped by increasing incomes in the world’s second fastest growing major economy.

The rise of India’s bellwether equity index, the Sensex, about six times—from 3,400 points to 20,200 between 2003 and 2007—that expanded shareholders’ wealth to $1.8 trillion also played a role in attracting retail investors.

But the equity allocation rate dipped to around 5% of household savings in the fiscal year ended March 2009 as the market slumped following the collapse of US investment bank Lehman Brothers Holdings Inc. in September 2008, leading to an unprecedented credit crunch.

The Sensex lost some 53% in 2008 as FIIs pulled out money to meet redemption demands in their home countries.

Both CLSA and Noble now suggest that the flow will increase though overall retail exposure to the markets is declining despite individuals allocating higher sums for investment in stocks.

The share of individual holdings in India’s market capitalization, which was some 17% in 2001, has come down to around 10% as promoters and institutions increased their share.

“The market has grown faster than individual savings rate (in equities),” said Saurabh Mukherjee, head of research at Noble in India. “Retail investors don’t have enough wealth to outshoot the market.”

However, some analysts such as Dhirendra Kumar, chief executive of ValueResearch, a New Delhi-based mutual fund industry tracker, reckon that the more important fact is that promoters are increasing their holdings even as the market moved from being a clutch of mom-and-pop run companies to ones that are more professionally managed.

“In 2001, there was still a hangover of surrogate holdings,” said Kumar. “Promoters believed that institutional shareholders would do their bidding and not destabilize them. That has changed.”