Those who got involved early have benefited from a jaw-dropping backlash. In U.S. dollar terms, Indian stock prices have risen 80% over the past five years, compared with 6% for emerging markets as a whole (see Figure 1). However, this joyful growth also comes with increasing risks. Many investors are venturing into financial markets for the first time but have limited understanding of the pitfalls. The exuberant mood has made Indian stocks look extremely expensive relative to their profits. Financial liberalization ignited derivatives markets—posing a threat to financial stability and new investors.
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The Rs 250-cr fund embodies India’s financial transformation. Its sponsor is Aditya Birla Sun Life, a joint venture between an Indian conglomerate (the first two words in the name) and a Canadian insurance company (the last two words). Although Sun Life Financial’s history in India dates back to the 19th century, it was forced out in 1956 when the Indian government nationalized hundreds of insurance companies as part of the socialist movement. At the crumbling entrance of a building in Mumbai’s old business district, a rusty sun sign remains a reminder of the company’s early days.
Sun Life’s comeback and new growth plans before the turn of the century reflected a shift in India’s political system. Financial liberalization began in the early 1990s, but did not benefit most parts of the country. Just over a decade ago, bank deposits and cash accounted for two-thirds of household assets, according to consultancy BCG. Now anyone can open an investment account, trade securities cheaply and have them held by a custodian. Not long ago, each of these seemingly simple steps created difficulties for less wealthy investors. Opening an account requires reams of paperwork; orders are placed through brokers, which charge obscene commissions. At the same time, stock certificates can be lost and vulnerable to theft or fraud.
The digitization of Indian finance is helping to drive this change. The country’s Unified Payments Interface, an electronic payments network, was launched in 2016 and is now widely adopted. It links individuals to bank accounts, thereby satisfying identification requirements and allowing almost instant withdrawal of funds to purchase stocks. The digital shift has facilitated dematerialization – the process of converting physical shares into electronic records.
As investment habits change, the share of bank deposits in household assets has fallen to less than half. On current trends, this number will reach one-third by 2030 (see Figure 2). A campaign supported by the Mutual Fund Industry Association that adopted the slogan “Mutual funds are the right choice” was a huge success. Account sizes are smaller: The average holding is under $4,000. The growth is driven by a wave of new e-brokers, the largest of which is Groww, which says it is “making the complicated super simple.” ”. The second largest is Zerodha: “Invest in everything.”
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Much of the growth has been driven by products for modest investors. The number of Systematic Investment Plans (SIPs), a way of investing in mutual funds, has increased from 10 million to 99 million over the past eight years, and contributions will increase to $24 billion by 2023 (see Figure 3).
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These funds pay monthly installments to investors. In August, they received $2.8 billion, continuing record monthly inflows that continued into 2016 with only minimal interruptions. There was explosive growth. 40% of the amount.
A wave of initial public offerings (IPOs) helped keep the enthusiasm high. In the first three quarters of this year, India’s 258 IPOs accounted for 30% of the global total, and the amount of funds raised accounted for 12% of the world’s total, while the Indian economy only accounts for a little more than 3% of global GDP. Zomato, a delivery company that went public in 2021, currently trades at a price-to-earnings ratio of 291 times, a price-to-earnings ratio that generally applies to fast-growing technology companies.
There are clearer signs of fanaticism elsewhere. Resourceful Automobile, which owns two Yamaha dealerships in Delhi, saw its share issue in August being oversubscribed 419 times. A recent report from India’s finance ministry warned that mis-selling in the banking and insurance industries was “too rampant to be dismissed as the aberration of a few overzealous salespeople”. Confidence in return.
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On the other side of the bet are some of the largest quantitative trading firms in the world. Jane Street is embroiled in a legal dispute with two former employees and their new employer, Millennium Management, a hedge fund. The firm claimed its former employees copied a lucrative trading strategy in the Indian options market, but Millennium and two traders deny this. The strategy generated $1 billion in revenue for Jane Street last year, more than a tenth of the company’s reported profits, according to legal notices.
Indian regulators are growing increasingly uneasy. In October, they announced new rules for derivatives markets that included raising minimum contract sizes for futures and options and increasing the margin required by buyers to protect against extreme losses on some short-term options.
After a long period of strong returns, coupled with a new wave of inexperienced investors, the risk of disappointment is even greater. Most Indian speculators will never experience an economic downturn. When someone arrives, they are bound to react unpleasantly. Based on expectations for results one year out, India’s large-cap stocks trade at a price-to-earnings ratio of 23, well above the 12 price-to-earnings ratio for emerging market stocks as a whole. Recent public offerings reflect the jitters. Hyundai Motor India’s October IPO was India’s largest-ever IPO, raising $3.3 billion. But the company’s current share price is about 7% below its IPO price. The Sensex index of Indian stocks is down more than 7% from its all-time high in September. Although the decline is small, it is worrying in the context of overvaluation.
There are also signs that better-informed investors are exiting. Data tracked by wealth management company Pace 360 shows that in the past 15 months, promoters (controlling shareholders of the company) have sold an average of nearly US$1 billion in net shares per month through the secondary market, much higher than ordinary investors. level. Foreign investors sold a net $11 billion in October, a record high. There are many reasons to praise the dynamism and growing inclusivity of India’s capital markets. Still, a possible bubble could bring harsh lessons about valuations, but at the expense of small investors who are just arriving.
© 2024, The Economist Newspapers Limited. From The Economist, published with permission. Original content can be found at www.economist.com
