Retail investors face bubble in smallcaps

The latest RBI report on changes in the household assets throws some interesting insights – out of Rs.14.90 lakh crore of incremental financial assets added by the Indian households in FY2016, about 87% has gone for the very safe avenues like bank deposits (41% of total incremental financial assets), life insurance fund (18%), provident & pension funds (14%) and currency (13.5%).  

In the last 10 years, the annual incremental financial assets flowing into shares and debentures have gone up by 171% — i.e. from Rs 33,857 crore in FY06 to Rs 91,763 crore in FY16. This is marginally higher than 155% rise in the overall annual incremental household financial assets to Rs 14.90 lakh crore in FY16 from Rs 5.84 lakh crore in FY06. Still the magnitude of financial assets flowing into the shares by the household sector is too low.

What has gone incrementally towards shares and debentures is just Rs 91,763 crore, which is just 6.2% of overall incremental financial assets of the households in FY16. Moreover, this Rs 91,763 crore of annual flow constitutes both shares and debentures and hence, the actual flow into shares alone would be much less than this figure. On the other hand, during the last 10 years, the market cap of entire BSE listed stocks moved up by 244% to Rs 113.5 lakh crore in October 2016 from Rs 33 lakh crore in October 2006 and that of BSE500 also moved up by similar proportion by 238% to Rs 103 lakh crore from Rs 30.5 lakh crore in the same period.

It is quite puzzling to see the dichotomy between the magnitudes of the build-up in the market cap versus the financial savings from the household sector flowing into the shares. Firstly, the actual financial savings flowing incrementally into shares are much less than the rise in the overall market cap of Indian stocks markets. Secondly, the market cap of small and tiny mid cap stocks has grown disproportionately larger than the annual flow of households’ savings into the shares. The stocks outside BSE500 represent mostly the small and tiny mid cap stocks, largely dominated by the retail investors. The households’ savings going into this particular segment must be much less than Rs 92,000 crore, if we exclude investments in debentures and also savings going into large cap stocks. Hence, the poor magnitude of household financial savings going into shares and the huge build-up of market cap of small and tiny stocks is a warning signal to the retail investors. In the event of any burst in the tiny and small cap stocks, the households do not have enough resources to back up this segment. Nor the institutional and foreign investors are present significantly in this segment. Therefore, playing safe in terms of allocation of household savings across the market cap segments and the banking on valuation of individual stocks is the key to grow the investments in the shares by the Indian households.

The writer is founder and managing director, Equinomics Research & Advisory Pvt Ltd