June 01, 2015

A Brief History of Investor Preferences

Last week, a research report from Morgan Stanley that said that“flows into equities from Indian households could aggregate to Rs19 trillion or US$300 billion (at the current exchange rate) over the next 10 years,”  made the headlines across newspapers and investment portals.  I haven’t yet got my hands on the report but going through what has been reported, I am not sure what to make of it.  For one, their forecast for the 10 years ending 2025 appears to be similar to what they had earlier said for the 10 years ending 2017 (see here), and for the 10 years ending 2020 (see here and here).  Yet the actual numbers over the last few years have been nowhere in line with those forecasts, and they seem to offer no explanation for that.  In any case, their current outlook (like their earlier outlook) is simply too optimistic for my comfort.  While I do believe that there is a whole new generation of investors ready to be tempted into equities (as implied by their report), I doubt if the reasons cited in the report are adequate triggers.  Fact is, the above-average allocations to equities in the early 90s were also driven by a wave of euphoria (unlike anything seen in subsequent bull runs) as well as the scarcity of professional opportunities to make money, of which there is no dearth today. 

As it turned out, none of the newspapers offered anything that would clear the air for me.  Most simply quoted from the report without any comment.  The lone exception that I came across was an opinion piece on FT Alphaville that hinted at taking the report with a pinch of salt.  Nonetheless, I think the release of this report offers an excuse to take a walk into the past to see how Indian households have historically allocated their savings.  But rather than have you wade through the mountain of data on RBI’s website and elsewhere, I have given below links to two charts that offer crisp snapshots on the preferences exhibited by Indian investors as a whole, over the years.

Physical vs. Financial Assets: This chart gives the allocation of yearly savings across physical and financial assets from 1990-91 to 2012-13.  The data is too limited to draw any meaningful conclusions about the factors that influence this allocation.  Investors as a whole, seem to prefer dividing their money somewhat equally between physical and financial assets.  Through the 90s there appears to have been a slight tilt in favor of financial assets but since 2000, there appears to be a bias towards physical assets.  This chart can be accessed here.

Allocation of Financial Savings: This chart gives the allocation across four categories of financial instruments from 1990-91 to 2013-14.  The categories are: a.Contractual (Life Insurance, Provident and Pension Fund) b.Fixed Income (Assured return options such as deposits, bonds and Government securities) c.Equity Shares and d.Mutual Funds.  You can use the arrow keys or swipe to move from one year to the next.  The chart also gives the prevailing deposit rates at the largest banks and the increase/ decrease in the BSE Sensex during each year.  The data shows an overall preference for assured return options irrespective of the level of interest rates or sentiment in the stock markets.  This chart can be accessed here.

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