The year that is about to end was nothing short of a roller-coaster ride for retail investors. Various developments on the economy and market fronts kept retail investors on the edge of their seats. While some investors dealt with these events with confidence, others succumbed to pressure and made rash financial decisions. By analysing some of the key market trends of 2018, one can gain valuable insights that can serve as a guide for investing in the future.
Leaning towards financial assets
The Indian stock markets scaled a new peak this year. In its two-decade history, the Nifty crossed the 10,000-point mark for the first time in July 2018. In August 2018, the BSE Sensex surged past 38,875. While the strong performance of select Indian companies and growing interest of global investors were the primary drivers of this rally, the contribution of retail investors to this momentum cannot be ignored. Post demonetisation, retail investors have shown increased affinity for financial assets like equities and mutual funds. In fact, more investors are now including these high-growth instruments in their portfolios than limited-growth options like fixed deposits. Before demonetisation, in March 2016 total fixed deposits in India stood at around ~61 trillion while assets under management (AUM) for the mutual fund industry stood at about ~14 trillion. Two years post demonetisation, mutual fund AUM registered a 26 per cent compounded annual growth rate (CAGR) to reach ~23 trillion in March 2018, while fixed deposits showed a 4 per cent CAGR to grow to ~66 trillion. Driven by participation from retail investors, the asset base of mutual funds in India rose to over ~24 trillion in the quarter ending September 2018, a 14 per cent surge from the year-ago period. This confidence in financial assets signals that Indian retail investors are waking up to the potential of financial assets in fulfilling their financial goals.
Key takeaway: The key takeaway from this development is that retail investors cannot ignore equities as an asset class if they wish to create long-term wealth. For the period 1979 to 2018, fixed deposits have offered an average return of 9 per cent when average inflation stood at 8.1 per cent. Equity investments, in comparison, have offered 16 per cent annualised return over the same duration, thereby beating inflation significantly. If investors want inflation-beating returns, there is no alternative to investing in equities.
Market volatility induced by liquidity crunch
From touching an all-time high, the Indian stock market went into a tailspin and witnessed a major correction. With the unfolding of the IL&FS saga in September 2018, the Indian financial system faced a major liquidity crunch. The central bank’s efforts to bolster a weak rupee and corporate tax payments exacerbated the liquidity shortage within the system. Even though the government stepped in to remedy the situation, the stock markets went into panic mode. Mutual funds, which had been financing NBFCs and HFCs in a big way, saw large-scale redemptions. Investors became wary of NBFCs and most stocks within this sector witnessed major declines.
The liquidity crunch added to the woes of a market experiencing turbulence due to the weakening of the rupee, rising crude prices, and developments in the US market. The upcoming elections and fiscal slippage on the domestic front added more fuel to the fire. Market uncertainty left retail investors worried, and they turned much more cautious.
Key takeaway: When the stock markets witness such high levels of volatility, investors need to remind themselves that no market remains down forever. Even historical data shows that markets always recover from a downturn. When the Sensex crashed by about 60 per cent in 2008 post the Lehman crisis, it bounced back by over 150 per cent over the next one-and-a-half years. Again, it corrected by 28 per cent in 2010 but rebounded by about 96 per cent over the next three years. Thus, retail investors need to accept volatility as a part and parcel of equity investing. Instead of getting anxious at every correction, investors should regard them as an opportunity to accumulate fundamentally strong stocks at a discounted value.
Economic growth and global headwinds
India’s GDP grew 8.2 per cent, the highest in two years, during the April-June 2018 quarter. Core sectors like manufacturing and construction recorded impressive growth and retail inflation showed signs of cooling down. However, global headwinds then played spoilsport. Elevated crude oil prices started impacting both current account deficit (CAD) and inflation. Foreign investment in Indian equities and bonds slowed down, further weakening the rupee. Citing a weakening rupee and rising oil prices as two major factors dragging down the economy, many global agencies have revised India’s growth projections downward to 6.8-7.2 per cent.
Coupled with volatility in the domestic markets, global headwinds have created a sombre mood in the markets. Investors have turned apprehensive about this vulnerability of the Indian markets and economy to global events. Against this backdrop, many investors have resorted to a wait-and-watch policy.
Key takeaway: Being a key player in the global economy, India cannot be completely immune to the impact of global developments. While these global events may slow down growth, they cannot prevent the economy from realising its potential over the long run. In 2003, India was a $0.5 trillion economy. It took us four years to become a $1 trillion economy in 2007, buoyed by a favourable global environment. We added another trillion to our GDP over the next seven years and became a $2 trillion economy in 2014, when global cues were not as favourable. We are already a $2.8 trillion economy in 2018 and are expected to enter the $5 trillion club over the next decade. This data indicates that the Indian economy is on a growth trajectory, irrespective of global developments.
In 2003, when our GDP was $0.5 trillion, market capitalisation to GDP ratio was 0.4 times, which should ideally be around 0.8 to 0.9 times. If GDP grows from $0.5 trillion in 2003 to $5 trillion say by 2027 or 2028, as projected, market capitalisation to GDP ratio is bound to increase as well. Huge opportunities, thus, await investors who believe in the India growth story and adopt a long-term investment horizon. Do research on sectors crucial to support this growth, identify credible players, and stay put for the long term to let the markets work their magic for you.
As we end this year amid uncertainties on the market and economic front, retail investors should see these events for the opportunities that they possess. With some research and planning, investors can start the New Year on a stronger note, better equipped to leverage whatever the year tosses in their path to financial prosperity.
The writer is MD & CEO, Axis Securities