The Sensex and Nifty are at record highs in anticipation of a Modi led NDA forming the government at the centre post 16th May 2014 when the general election results will be declared. However the Aam Aadmi is not smiling away to glory and is in fact bemused by the rally. Data shows that retail investors have been consistently withdrawing from mutual fund equity schemes over the last one year even as the Sensex and Nifty have climbed by 20% over the period.
Why is the average Indian not enthused by the market rally? The reason varies from a weak economic environment to poor returns over a six year period. Here are five reasons why the Aam Aadmi is not cheering the equity rally.
- Downtrend in the economy is hurting job market sentiments – India’s GDP growth has dropped from 8.4% levels seen in 2010-11 to below 5% levels in 2013-14. The growth downtrend has hit the private sector hard and except for a few sectors such as IT, Pharma and FMCG all other sectors have faced slow to negative growth. The auto sector that is one of the largest employers in India is witnessing negative growth over the last two years. A weak capital market has hit financial services while banking has been hit by bad loans. Infra is in doldrums. In this weak economic environment the Aam Aadmi is finding it difficult to retain jobs or find new ones. Pay rises have been curbed. The equity market rally is not telling on improved job prospects.
- Inflation has hurt savings – The consumer price inflation running at 9.5% levels over the last five years has hurt the Aam Aadmi badly. Disposable income has come off and with job prospects hit, the ability to save has been hit. Higher interest rates due to inflation has made servicing of loans difficult leaving nothing or very little to save. The Aam Aadmi has been drawing down on all liquid assets including equity to fund higher living expenses due to inflation.
- Household savings in equity is just 3% of total savings – The Aam Aadmi is underexposed to equity. The share of equity in total savings is just around 3% and any rise in equity market levels does not create any kind of wealth effect. The equity rally is only benefitting FIIs who have been net investors in equity over the last five years and promoters who hold a good amount of stake in the companies where valuations have gone up.
- Equity markets have been severe underperformers over a six year period and the Sensex and Nifty have returned just around 10% from peaks seen in 2007-2008. Investors have been hurt by the weak equity performance and as they largely go by past returns even if that is not the way to look at equities, there is no incentive to invest in equities.
- High property prices and gold prices are taking up dis-proportionate chunk of savings – The weak economy has not deterred property prices from rising through the roof largely due to black money, corruption and politician-builder nexus. The Aam Aadmi wanting to own property has had to use all savings to put as down payment for property leaving nothing else to invest in other asset classes. Gold is still the preferred first buy for the Aam Aadmi and given that gold prices have almost tripled over the last six years, all savings are going towards purchase of gold. Equity does not figure anywhere in the list of savings for the Aam Aadmi.
When will the Aam Aadmi start investing in equities? The pre conditions for investment in equities are a) Stable job prospects b) low inflation and c) continued strong performance of equity markets to make past returns look good. Job prospects can improve only when there is improved economic sentiment and that is at least one year away given the current macro economic situation. Inflation coming off is two years away going by RBI target of 6% CPI by end March 2016. CPI inflation is at 8.3% as of March 2014.
Equity markets continuing to perform depends on factors such as global economy and domestic policies. The prospects for equities are definitely brighter than what it was a few years ago given stability in global economies and markets. FIIs would continue to invest in Indian equities and would reap the rewards of rising markets while the Aam Aadmi will step in a couple of years down the line to start investing in equities.