Wednesday, January 12, 2011
RED CARPET FOR RETAIL INVESTORS = SENSEX / NIFTY MOVEMENTS = FII PARTICIPATION
INDIAN STOCK MARKETS
Vis a Vis
Indian Stock Markets out perform or underp-erform other world markets periodically – not based on their own inherent strength – but because of FIIs’ BUYs and SELLs.
This has become a regular feature of Indian stock markets in recent past.
FIIs and Foreign retail Investors are always welcome to Indian Markets. Likewise, Indian Investors can have openings to premier world markets. The world can become a Global village in this arena easily. It is good. Except that, the movements across the markets must be more logical and more information-based.
The basic strength of the Indian Stock Markets, or, for that matter, the stock markets of any country, should depend on its own (for us, Indian) Buyers – not on FIIs and Foreign retail investors. The others can add a little more strength to the local markets. India is a country with over 100 crores of population. It must have inherent strength in itself, independent of the FIIs.
If market movements are heavily dependent on FIIs, Indian markets will always perform in a quixotic way.
Indian companies are turning out the healthiest numbers quarter after quarter, but if their stock prices are falling simultaneously in an inverse ratio to company performance, the stock movements becomes illogical.
Where lies the problem? Where lies the solution?
The problem lies in non-participation of most of the Potential Indian Investors in the market operations of the stock markets.
The solution lies in bringing in Indian retail investors in much larger numbers – by
(i) restoring their confidence in the performance of our stock Markets,
(ii) educating them on the market players and market dynamics
(iii) reassuring them on the long term health of the Indian economy and thus, of the Indian stock markets.
Indian retail Investors depend on market intermediaries like Mutual funds, DIIs and Brokers for entering stock markets and making investments.
With online trading platforms getting established and institutions like ICICIDIRECT providing efficient buying and selling platforms to retail investors, the ancient problems with brokers are gradually becoming a thing of the Past.
Today, there is more information and more reliable information as well, on company performances, their future plans etc. These are the positive features.
But there are negative features. Indian Mutual Funds and DIIs do not seem to be benefitting their retail Investors in any significant way. They seem to concentrate more on ensuring their own profits and attractive commissions to Agents. In the short term, this works for the institutions and the Agents. But, it doesn’t work for the man putting his hard earned money into their hands.
The actual investor must benefit significantly and stay on in the stock market – if the MFs/DIIs /Agents have to survive and thrive in the long run.
They should all clearly understand that – (1) Mutual Funds are not the real Investors (2) DIIs are not the real Investors (3) Agents are not the real Investors.
The real Investor is the one who is coughing up the money from his Pocket. He is the retail Investor. If he does not prosper, others too can’t prosper in the long run.
These institutions must therefore ensure that the ultimate customer, namely the Indian retail Investor, benefits more from the stock market and does not lose out either because of the MFs/DIIs’ greed or because of the faulty investments they make.
Barring a few, a majority of Mutual funds and DIIs do not seem to benefit the Indian retail Investors significantly.
WHAT SHOULD MFs / DIIs DO?
I strongly feel and adocate that Indian MFs and DIIs must perform better in 2 aspects. (1) They must invest much better and (2) They must reward the ultimate Investor, the retail investor, much, much better than today.
During 2010, as in several earlier years, retail participation was LOW – lower than the Potential available in India – for several reasons. In fact, periodically there were reports of a large number of retail investors getting out of the market.
Every time a retail investor enters Indian stock market, he gets out badly bruised and losing his shirt. Very few stay on, learn their lessons and become intelligent investors, who do not need the market intermediaries any more.
Most of the potential Indian Investors have become hesitant to re-enter stock markets. Many people downright advice – don’t go near stock Markets; You will burn your fingers.
And, all this pessimism has to be credited (or, debited) to the market intermediaries. It cannot be explained in any other way.
Most of the time, we find that our fund Managers and DIIs are concentrating on benefitting either themselves or their agents and intermediaries much more than benefitting the Ultimate Investors.
COMPARISON WITH INDIAN CRICKET:
It is much like Olden days Indian cricket – when all cricket officials used to get huge pay packets while actual players got a pittance. Consequently, the performances on field were very poor. We had good players, but we were consistently LOSING. Then the situation reversed, and the players put their foot down on this unequal dispensation. See the current days; Indian cricket performs so well. It is number.1. Our cricketers fight to play, play to earn and earn to win. The player is the one sweating and winning. He must benefit.
When he does, Cricket wins. Everybody wins.
INDIAN RETAIL INVESTOR :
The same thing should happen with the Indian retail Investor.
There are about 50 crores of potential Investors in India. If they can be attracted to stock market and made to benefit from it – they benefit and all market intermediaries will also benefit. India will benefit. As a consequence, FIIs will also naturally flock to India, when this happens. Retail Investors will not enter markets, simply because FIIs are entering the market and driving up the market a few points.
Why does a retail Investor come to stock market at all?
Banks are offering an annual interest rate of 8.5%. But, inflation rate is also around this number! So, where does this combination leave the ordinary Indian citizen who puts his money in Banks? He either stays at same level or becomes poorer.
We say, GDP is growing. But, Inflation is growing equally fast. This also leaves the ordinary Indian citizen (with fixed incomes) where he is or it makes him POORER. Obviously, INFLATION must fall considerably in India.
Stock Market Investments are a way – for the Investor to beat the inflation. They are also the best way – for the Nation to improve its productivity and its GDP.
And, Indian companies are not belying any of the expectations placed on them in respect of their performance. The private entrepreneurs of India have truly come of age.
In this scenario – the Indian retail Investor, like the Indian Cricketer, must get primacy in rewards.
SEBI, IRDA and even the Finance Ministry should ensure better regulation of markets – the primary focus being, giving primacy to the retail Investor in rewards for his investment.
They should make a study of all mutual funds and DIIs to see (1) How much the Funds/DIIs retained (2) How much was spent on fund Management (3) How much the brokers and agents got (4 ) and, how much, if any, the actual investor, the person who put in his hard earned money, got as NET RETURN.
SEBI, IRDA and Finance Ministry must ensure that the NET RETURN to retail investor is considerably higher than the Bank rate of interest on long term deposits.
INDIAN COMPANIES & THEIR PERFORMANCE :
Indian companies are performing well. But, because of the quixotic behavior of the Indian stock Markets, their stock prices are not reflecting their inherent strength and their long term prospects.
Take the case of RIL. Does RIL deserve only its current price – based on its medium / long term outlook? As some one estimated, Mukesh Ambani could create more assets than Microsoft, in a few years time from now. But, if he still does not become world No.1 in asset value, blame it on the Indian stock markets and their dependence on FII BUYs and SELLs.
Or, take the case of TATA MOTORS. It is one of the best Multinationals from India now – with a hugely promising future. I won’t be surprised at all – if it competes with the likes of Ford successfully in a few years from now. It only needs to tweak its R&D just a little more.
If Hero Honda learns a lesson or two from TATA MOTORS, it could beat Honda at its own game easily. Ditto with many other Indian companies.
There are any number of such great companies in India.
The Indian IT sector biggies like TCS and INFOSYS are in great health. Unlike a decade ago, their performance today is guided by their own products, and not mere projects, like standardized Banking solutions and many other original Industry solutions. Indian Banking Solutions are today operating in many Large banks worldwide.
Take Banking sector. Indian Banks are in the pink of their health. Almost all of them are growing at a healthy rate of 20 percent plus. I am sure, any one can bet on them for long term growth. Almost None of them will fail. Just contrast them with US or European banks. You can Bet on Indian Banks. They are the best.
Indian Pharma sector is producing generic drug solutions in large numbers. This is the base on which it needs to build world class companies. Some are also producing internationally approved, branded products. Our Pharma sector has potential to be world No.1. All that they need is a little more R&D Spend.
Indian Power sector will come of age in 2-3 years. Infra sector needs a little push from Governments. India would do well to divert 50% of its NREGA funds to INFRA sector and create more number of jobs on a long term basis and at the same time, building huge permanent assets for India. Infra sector will any way go a long way in 2011 and 2012.
With so many sectors performing so well and being in so great health – if the stock markets still nose-dive periodically – merely because of FII entry and exit – it only shows how we are failing to attract Indian money first into Indian markets.
A FINAL WORD:
(1) I strongly advise MFs and DIIs to start benefitting the Ultimate Investor much more than at present, by tightening the belt around themselves and their agents. Investors must gain confidence. Investors must benefit.
(2) Let there be more positive sentiment built on the basis of solid numbers. The reality is – India is performing well. But, by sheer negative sentiment, we drive down stock prices.
(3) We have GDP. We have IIP. There are so many numbers. But, we also need Indices relating to production, sales and Profits numbers of stock market listed companies. A generalized GDP, IIP etc is not a reliable guide for Market Investors. It should be more stock market specific.
SENSEX and NIFTY are the major stock Indices. So, we measure stock market performance by these indices. Let us also measure by suitable indices the progress made by the SENSEX / NIFTY companies in terms of their production /Sales /Profits. Let us assess whether SENSEX /NIFTY INDEX movement is in consonance with the SENSEX/ NIFTY Companies’ Profit Index / Production Index etc.
(4) SEBI / IRDA / FINANCE Ministry should constantly monitor the NET RETURN to investors from the MFs and DIIs and ensure that it is much better than the Bank Rate of Interest.
Hail the Indian retail Investor. Roll out the Red Carpet for him.
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