Indian Investors Lose Faith; Country’s Retail Stockholders Are Dumping Shares After Years of Nursing Losses

Indian Investors Lose Faith

Country’s Retail Stockholders Are Dumping Shares After Years of Nursing Losses

SHEFALI ANAND

Jan. 27, 2014 6:11 p.m. ET

MUMBAI—India’s blue-chip stocks have held up relatively well in the recent emerging-market selloff. But that is little consolation to the country’s retail investors, who are dumping shares after years of nursing losses.

Many individual investors in the world’s second-most-populous country have grown disillusioned with paltry returns on shares of small and midsize companies. Although these companies account for the vast majority of the stocks listed on the Bombay Stock Exchange, they have fallen behind the 30-share benchmark Sensex index since the 2008 financial crisis. Many of these firms have struggled to grow amid a sharp slowdown in India, and some are struggling to repay debt taken on when India’s economy was booming in the mid-2000s.

Individual investors in India in the past have been a key driver of the country’s stocks, and the absence of many of these investors from the latest run-up raises questions about the prospect of further meaningful gains and exposes the market’s vulnerability to fleet-footed global investors.

The Sensex hit a fresh record Thursday, the same day the MSCI Emerging Markets Index slid on weak Chinese economic data. India’s blue-chip index is down 3.1% since then, compared with a 4.6% decline in the MSCI.

India’s broader S&P BSE 500 index in recent days has trailed the Sensex and is 15% below its record set in January 2008. Another index that reflects share-price performance of medium-size companies remains 38% below its 2008 record.

From the start of September through Friday, Indian mutual funds, a proxy for the behavior of individual investors, unloaded $1.6 billion of shares, representing an acceleration of selling from earlier in the year, according to data from the Securities and Exchange Board of India.

In the same period, foreign institutional investors poured about $9 billion into Indian stocks, according to the regulator. This represents a pickup in buying by global fund managers, many of whom are betting the growth outlook for India’s downtrodden economy will brighten if federal elections in the spring usher in reform-minded lawmakers.

Analysts and strategists attribute the rise in Indian shares in past months partly to these foreign inflows.

But many retail investors aren’t convinced that the gains will stick. India’s economy is forecast to rise 4.8% in the year ending March 31 by trade association Federation of Indian Chambers of Commerce and Industry. That would be the worst showing since 2003.

Phiroj Uttaray, a 34-year-old engineer in the eastern state of Orissa, first invested in stocks in 2005. Mr. Uttaray bought mostly smaller companies, such as wind-turbine maker Suzlon Energy Ltd. 532667.BY +2.15% and engineering firm and property developer Hindustan Construction Co. 500185.BY +1.73% Both companies are wrestling with heavy debt burdens, which have crimped profits. In the span of a year, shares of Suzlon Energy rose almost 50%, closing at a record 2,273 rupees ($36.23) on the National Stock Exchange in early January 2008. Wednesday, the stock closed at 10.25 rupees.

Mr. Uttaray has seen the value of his portfolio of shares fall more than 85% since 2008, and lately has been paring his holdings. “I’ve lost faith,” he says.

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Out of the 500 companies in the S&P BSE 500 index, 30 companies have attracted two-thirds of foreign-investor inflows since 2012 through Sept. 30, 2013, according to estimates by BNP Paribas Securities India. Some, but not all, of the 30 companies are components of the Sensex.

These companies, such as HDFC Bank Ltd. 500180.BY +0.07% , software firm Tata Consultancy Services Ltd. 532540.BY +0.30% , and cigarette maker ITC Ltd.500875.BY -1.11% , remain a draw for foreign investors because they are perceived to be better-managed and have less exposure to the unpredictable nature of India’s politics and domestic economy.

Anjun Zhou, managing director and head of Multi-Asset Research at Mellon Capital Management Corp., which oversees $350 billion of assets, expects Indian shares to benefit from a faster pace of growth boosted by a rise in exports. The money manager holds Indian shares, mostly blue chips.

But Ms. Zhou says domestic investors’ flagging participation in India’s stock market could discourage global investors from boosting their own exposure. “We do monitor what domestic investors are doing, and we try to understand the reason behind their caution,” she says.

Not all domestic investors are staying away. Mumbai banker Raj Sen, 39, says his portfolio of individual stocks has lost value since 2011, but he has since turned to buying stock mutual funds instead to capture a larger swath of the market. He believes stocks will rise over the longer term as increasing consumption by India’s one-billion-plus population drives economic growth.

“Opportunity is still there,” Mr. Sen says.

Still, many of India’s retail investors are waiting for the right moment to sell.

Mansukhlal Mehta, 73, has been investing his retirement savings in stocks since 2000. He says the value of his stock investments has been halved in the past five years, and he expects more tough times ahead.

“I feel that things are not going to go that well,” says Mr. Mehta. Small investors and their brokers, he says, “are all crying, every day.”

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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