Indian investors ready to put their money in riskier assets

Indians, it seems, can't get enough equities these days. The recent gargantuan $3.5 billion (Dh12.84 billion) Coal India IPO — by quite a stretch the country's largest to date — was meant to mop up all of that interest out there, but what it did was only stoke an appetite for more.

There're more of them coming — the Shipping Corp of India (SCI) will come out with one, and there will also be an offer from the highly coveted Indian Oil Corp (IOC). Also working their way to the start line are the Oil and Natural Gas Corp. (ONGC), a Fortune 500 enterprise, and the Punjab National Bank.

Expectations of these public offerings and potentially more to come have melded with the robust economic growth — of eight per cent and more — to propel the benchmark stock index, the Sensex, to re-enter 20,000-point territory just recently. Though there has been a retreat from that lofty height, the decline has remained within a narrow band. In fact the correction of about 5.5 per cent could be looked as buying opportunities, particularly for the long term investors, some analysts say.

"Indian high networth individuals [HNIs], both in India and abroad, seem to be most comfortable with the Indian equity story and they are putting money in while generally steering clear of other global markets, certainly the developed markets," said Hrishi Parandekar, CEO of Karvy Private Wealth, a fund management and advisory company.

"And there continues to be strong NRI interest in Indian stocks, both through IPOs and through the secondary market."

Data from a variety of sources attest to the significant build-up of interest among Indians for equity plays. Karvy Private Wealth has just come out with its own report which reckoned that the total wealth in India held by individuals is estimated at a whopping Rs73,000 billion, of which direct equity takes up 31 per cent and mutual funds another 3.8 per cent. This compares well with the 35 per cent which is the estimate of individual wealth held globally in equity.

Debt instruments continue to be the preferred investment vehicle for Indians, and make up 65 per cent of such holdings. The rationale for this preference is simple — an aversion to risk and a sentiment built up over decades. But over the last decade and more, investors have been showing a measure of interest in asset classes that carry a higher risk percentage.

Also, for those who prefer not to have a direct exposure to equity, there is the option of having an exposure through mutual funds. Their penetration levels have increased significantly over the last decade or so, though this is still far below that observed in developed markets.

Market observers see the transition to be a gradual process, and will have to take into account factors such as the trickle-down of investible wealth has historically been a slow process in India. Then again, there is that innate urge to seek capital protection and the consequent aversion to carrying any risk elements.

"All investors go for returns with some implicit desire for capital protection," Parandekar added. "Indian investors will continue to be skewed towards fixed income through mainly bank deposits and small savings.

"But over the medium term, we do foresee a continued shift towards slightly riskier assets in the form of equities [whether direct or mutual funds or whatever other route] and into alternate assets, mainly capital protected structured products."

Wealth to double

The Karvy report expects the wealth in India held by individuals will almost double over the next three years and grow from the present Rs73,000 billion to Rs144,000 billion by 2012-13. "A large young educated population, which is open to investing their savings in different financial assets backed by a promising GDP growth rate will be the major contributor to this growth. We expect a much larger exposure towards the equity asset class and believe alternative assets will be the fastest growing asset class in the next few years," it added.

This would tie in neatly with a parallel move by the country's federal government to reduce their stakes in the corporations they own. While there has been much resistance to such moves from certain political quarters, the present government has shown the intent to carry through with the disinvestment process to the logical end.

More than 50 government owned entities should be going through the transition. Private investors seeking their fill of equity plays can't ask for more, can they?

"Coal India was about Rs160 billion in size, Power Grid is lined up at Rs80 billion, and we have follow-on public offerings (FPOs) for PNB and Shipping Corp. of India which should be in the range of Rs40 to Rs80 billion," said P. Krishna Murthy, CEO of the financial services division at Al Rostamani Group.

"All these issues are quite large by themselves, though compared to Coal India's they may look a bit small." [The $1.7 billion Power Grid public offering opened on November 9]."

But a closer look would reveal that institutional buying was what propelled the high demand for the Coal India offer. That's not to say, retail investors were conspicuously absent.

Murthy believes that retail investors in India have yet to wholeheartedly take to the equity culture. He lays out some markers for why he believes this is the case: "For many of the FPOs the retail portion is not even subscribed one time," Murthy said.

"Even Coal India was subscribed by two times, and Power Grid seems to be heading for two times as well. The open interest in Power Grid is less than even 1 per cent of its market cap [as of November 4] — this would confirm there has been no build up of short positions on expectation of the FPO issue.

"Considering the overall participation of retail investors, my guess would be that NRIs would have also participated with less interest. Hence, there is actually still a lot of room under the retail category for NRIs to participate."

A sentiment that funds support from Parandekar: "Every IPO has a well-defined retail allocation which is quite significant. But if you look at subscription numbers, you will see the retail portions of the IPOs are significantly less oversubscribed compared to the HNI/non-qualified institutional buyer and qualified institutional portions."

Coal India's retail portion was a little $1 billion out of the total $3.5 billion issue size, and the upcoming ones are expected to have a similar proportion. So, for the future ones, will it again be a case of institutional buying driving the process and retail investors just making up the numbers? No one can be sanguine whether equity is still seen as a high-risk play by a large segment of the country's investor base. Are other investment options such as real estate proving more tempting?

"There will always be some or the other flavour of the season," said Parandekar. "However, I don't believe it is currently real estate at the expense of stocks.

Money articles do not constitute investment advice on the part of Gulf News. The reports, opinions and analysis in articles contain general recommendations only and appropriate personal financial advice should be obtained from qualified, professional investment advisers at all times.

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