RETAIL INVESTORS STILL SHY FROM MARKET DESPITE BULL RUN- PHDCCI SURVEY

New Delhi, Saturday 7th July 2007 – Despite the vaulting sensex, buoyant primary market conditions-as demonstrated through oversubscribed and frequent Initial Public Offerings (IPOs) and higher corporate business confidence, retail investors are still shying away from investing in the stock market, according to a survey undertaken by the PHD Chamber of Commerce and industry (PHDCCI). 

“Our research shows that the bulk of IPOs are subscribed by FIIs, qualified institutional borrowers (QIBs) and high net worth individuals (HNIs).  Apart from lack of retail investor confidence, this could also be attributed to higher price band of the issues, treating small investors not as a preferred category and the like,” says Mr Sanjay Bhatia, President, PHDCCI quoting the findings of the survey.

Most of the respondents to the Chamber Survey do not consider the present bull run as “irrational exuberance” since bullishness can be directly linked to the pink health of corporations, strong and robust macro-economic variables and more importantly, the expectations of the corporates to ‘up’ the performance in the future.   Around 40% of the respondents confirmed that they were seriously looking into the prospect of embarking on new ventures to take advantage of the favourable market conditions.

When asked to rank the immediate reasons for the sustained bull run, 75 per cent of the respondents said that good corporate results, coupled with higher expectation of doing well in future, riding on the back of strong buoyancy in “aggregate demand”, was the primary reason for the pick-up. Increasing flow of FIIs, pension funds and  hedge funds through broker-firms and taking advantage of interest rate arbitrage were pointed out as the other reasons for the stock market boom. Only an insignificant number of respondents have pointed towards improving investor confidence as one of the reasons for the bull run.

To another query whether the bull run will be sustained, most of the respondents pointed out that barring some technical corrections, there will not be any radical changes in the pattern of growth in the coming days. However, rising interest rate, the unlikely event of a lacklustre monsoon, possible increase in interest rates in Japan, China and US (where investors source funds at lower interest rates and invest in emerging markets like India where returns are higher) can act as possible dampeners to the existing mood. Also the respondents felt that Indian stock market is showing maturity as demonstrated by performance of various industry segments. “The perception that IT stocks are the key drivers of growth is fast changing so also the dividing line between blue chip and ordinary shares. Investors are looking more at stability and return while putting their money into the market,” says Mr Bhatia, quoting survey findings.

To another query about globalisation of the Indian capital market, respondents to the PHDCCI survey  felt that international developments and money and treasury operations are increasingly impacting the Indian scene. Indian investors are now getting glued to day-to-day currency movements, current account positions of the major economies including macro-economic variables like inflation, employment, interest rates, money supply, exchange rate etc. before taking any position-long or short- in stock, derivatives and commodity markets.

However, a sizeable number of respondents felt that Indian stock market should think of some liquidity creating instruments like, shorting, call and put options and  expanding the scope of commodity and derivative trading with adequate in-built regulatory mechanisms. Also, a system should be developed for allowing the hedge funds to invest in India directly without the interlocution of the brokerage firms under the watchful eyes of SEBI. Also, respondents feel that there is need for developing the debt market as an alternative source of finance for companies. Greater participation of the Institutional Investors like LIC, IDBI etc. in the stock, debt, commercial paper and money markets should be encouraged as was the case in the eighties, when they were predominant players in the market.

The respondents, while acknowledging that there was higher degree of dis-intermediation among the corporations from the banks and financial institutions for funding their modernization and expansion plans, felt that for the small and medium enterprises’ dependence on banks still continues. In fact, the huge cost involved in tapping resources from the market coupled with apprehensions of an adverse investor reaction, make most of the SMEs shy away from going to the market. For the small and medium sector there should be special vehicles like the OTCEI, which was set up by the Government to help the SMEs, but could not achieve its potential.  The creation of an institution such as AIM of London could also be considered to help SMEs to list their shares in the stock market.