Equity Investing RIP | Value Research The equity markets, some parts of it, are zooming up but there but the Indian investor has disappeared
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Equity Investing RIP

The equity markets, some parts of it, are zooming up but there but the Indian investor has disappeared

After five years, the large cap indices--the BSE Sensex and the NSE Nifty--have touched new high points. In a manner of speaking. Why in a manner of speaking? Because we live in a very different world since the Sensex' previous high, which was 20,827 points on January 11, 2008.

If one were to adjust the Sensex for inflation since that date and try to arrive upon its real value, it turns out that the index now stands at about 13,000 points. If one also takes into account the companies that were subsequently take out of the Sensex (because their stock prices collapsed spectacularly) then it turns out the Sensex is actually at about 11,500 points today. And if one were to further calculate a dollar-adjusted price for the Sensex (without the inflation adjustment, because that would not be fair), then it turns out that the Sensex is today at about 13,770.

It gets even worse when you move outside the exalted sphere of the large-cap companies that the Sensex and the Nifty are composed of. The NSE mid-cap index is 22 per cent lower than its high, even without any of its adjustments and the small cap index is 58 per cent lower! Using the same scale as the Sensex for comparison, an inflation adjusted small-cap index is now down from about 20,827 to 6,250. That's a steep decline indeed.

So, are you surprised then that the despite the laboured efforts of the headline writers, there is absolutely no excitement about the equity markets that an all-time high should bring. The business of getting people to trade in equities is actually dying. In the last couple of weeks, two major retail brokerages, HSBC Investdirect and IIFL have announced that they are getting out of the business. Back in January 2008, this business was in a very different situation, to say the least. The latter outfit is actually said to be the country's largest retail brokerage. The carnage is even worse for smaller stock brokers. According to SEBI data, almost 500 brokers have officially shut shop since the current financial year began. That's close to three brokerages shutting down on every working day.

There are a number of reasons for this but the main one is that retail equity investors lost way too much money and this has left them not just apathetic but actively hostile to equity investments. The index levels that I've quoted above are actually quite benign compared to the mount of money people have lost by following the advice of their brokerages. As has been clear for years from the aggregate data, brokerages were almost entirely in the business of guiding clients into leveraged derivative trading. The losses that investors suffered there have been completely out of proportion to the fall of the indices. Not just that, at some point after the equity markets collapsed the same intermediaries moved investors to highly leveraged commodity trading.

While India never had any substantial number of individual investors who would buy for delivery and then hold equities for a while, trends in the last six-seven years have seen such activity drop close to zero. And it's quite clear that the prolonged stagnation of the equity markets is only one part of the cause, and the mutant investment culture fostered by the intermediaries should carry the bigger blame for investments not reviving even when the markets are showing signs of life again.

In the face of all this, SEBI's longstanding crusade encourage retail investors appears even more quixotic. No matter where stock prices go from here on, it's best to recognise that the old model of retail investing is dead for good and is not showing any signs of revival even as the markets are. The sensible way in which such investors should come back is probably through low-cost equity funds like index funds. That's the route which the regulator and financial intermediaries should look to encourage.




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