The Retail Investor in the Stock Market Continues to Remain a Sucker

The National Stock Exchange’s Nifty index recently crossed the 10,000 mark for the first time and a lot of song and dance was made around it. Human beings really love big round numbers and that explains our fascination for stories around stock market indices crossing certain levels.

The much older BSE Sensex also has remained above the 32,000 levels for the last 10 days.

The bigger question is whether the retail or small investor has made money in the stock market or not? One good way to figure out is to look at the total number of mutual fund folios. Take a look at Figure 1. It plots out the total number of mutual fund folios as well as retail mutual fund folios since March 2008.

Figure 1: 

Figure 1 plots the mutual fund folios. The first two entries are for as of March 2008 and March 2009. After that the figure plots six monthly data up until September 2014. It then plots quarterly data for mutual fund folios. The blue line plots the total number of mutual fund folios and the orange line plots the total number of retail mutual fund portfolios. Figure 1 makes for a very interesting reading. The total number of retail mutual fund folios had stood at 4.69 crore as of September 2009. They fell by 19.1 per cent to 3.8 crore portfolios as of the end of September 2014. During the same period, the Sensex gave an absolute return of 55.5 per cent (or 9.2 per cent per year). But these returns were not enough to lead to an increase in interest of the retail investor in committing his money to equity mutual funds. This, for the simple reason that he or she was nursing the losses he had made by investing in equities through the direct as well as the indirect route, after the stock market crash of 2008-2009.

Since September 2014, the total number of retail mutual fund folios started to rise again. Take a look at Figure 2. It plots the yearly increase in retail mutual fund portfolios since March 2011.

Figure 2: 

What does Figure 2 tell us? It tells us that the rate of increase of retail mutual fund folios has gone up in the last two years. Between March 2016 and March 2017 grew by 15.2 per cent on a much larger base. Take a look at Figure 3. It plots the quarterly increase in retail mutual fund folios, since December 2014.

Figure 3: 

What does Figure 3 tell us? It tells us that the rate of quarterly increase in mutual fund folios has been the highest in the last quarter between April and June 2017.

Between September 2014 and June 2017, the period during which retail mutual fund portfolios have risen dramatically, how well has the stock market done? The Sensex has given an absolute return of 16.1 per cent (around 5.6 per cent per year). Now compare this to the situation between September 2009 and September 2014, when the Sensex went up by 55.5 per cent and retail mutual fund portfolios fell by a fifth.

What does this tell us? It tells us that the retail investors need a lot of validation before committing their money to the stock market. It tells us that the marketing spin of the Modi government about the economy being in a reasonably good shape, seems to be working with the investors. Further, it tells us that the returns from other forms of investing from fixed deposits to gold to real estate, have been abysmally low, leading to money finding its way into the stock market. It also means that the investors who have invested after September 2014 have missed out on the bulk of the rally. It also tells us that retail investors look at stock market levels before committing money to the stock market rather than past returns.

Of course, the stock markets might continue to rise and all the investors who have come in late, might also get to party. We live in the era of easy money and the astonishing amount of money created by the Western Central Banks can keep fuelling stock market bubbles till kingdom come.

But if the rally does not continue, the world will need to learn an old investment lesson all over again-the retail investor continues to remain a sucker.

The column originally appeared in the Equitymaster on July 31, 2017.

बिना सनी देओल के कैसे बनी Dunkirk?

sunny deol

ऊ बोलिस के एक ठो अंगेरजी में Dunkirk करके सिनेमा आया है. देखेंगे का?

अरे एक बार बॉर्डर देख लिए उसके बाद भी कोई यो वॉर मूवी बचा है का देखने के लिए?

अरे बहुते अच्छा स्पेसल इफ़ेक्ट दिया है, हम सुने हैं.

अरे दिया होगा! पर एक्को ठो गाना नहीं है फिल्म में.

पर सुने के बैकग्राउंड म्यूज़िक बहुते बोवाल है.

अरे रहने दो. इ भी कोई सिनेमा हुआ, के हेरोइनवा एक्को बार रोइ नहीं, गणवा भी नहीं गाई. कुछ नहीं तो संदेसे आते हैं वाला गणवा ही डाल दिया होता.

हैं?

और नहीं तो का.  जे पी दत्त्वा से केवल राइट्स तो लेना था…और सोनुवा तो ऐसे भी बेकार है आजकल, फ्री ये में गा दिया होता.

हैं?

और बताईये, सनी देओल के ढाई किलो के हाथ के बगैर कोई वॉर मूवी बन सकता है का…

एक थे सुशासन बाबू…

220px-Nitish_Kumar

विश्वस्त सूत्रों से पता चला है के सुशासन  बाबू उर्फ़ निकु की ज़िन्दगी में बशीर बद्र की एक ग़ज़ल का बहुत ज़्यादा असर रहा है.

उस ग़ज़ल के चाँद अशआर कुछ यूँ है:

मुसाफ़िर के रस्ते बदलते रहे 
मुक़द्दर में चलना था चलते रहे

मोहब्बत, अदावत, वफ़ा, बेरुखी
किराये के घर थे बदलते रहे

अब कोई एक जगह जहाँ के मोहब्बत, अदावत, वफ़ा और बेरुखी का मिश्रण खूब चलता है, और लगभग एक साथ चलता है, वो सियासत है .

और सुशासन  बाबू इस बात को खूब समझते हैं…

Where George Orwell meets Wasim Barelvi 

george orwell
अभी कुछ दिनों की बात के एक मित्र जो के हिंदुस्तानी में थोड़ा बहुत लिखते हैं, उन्होने पुछा के जॉर्ज ओरवेल की Animal Farm में एक पंक्ति है “All animals are equal, but some animals are more equal than others,”  इसका हिंदुस्तानी में क्या अनुवाद होगा.

अब एक तरीका ये था के ओरवेल की इस पंक्ति का सीधे सीधे अनुवाद किया जाए. मुझे ये तरीका बड़ा बोरिंग लगा, क्यूंकि हर भाषा में इतनी गहराई होती है, के कम से कम मिसाल तो उसी भाषा में दी जा सके.
तभी मेरी tubelight हमेशा की तरह देर से जली और प्रोफेसर वसीम बरेलवी का एक शेर याद  आया: “गरीब लहरों पर पहरे बिठाये जाते हैं, समन्दरों की तलाशी कोई नहीं लेता”. इस शेर का भी लगभग वही माने है जो ओरवेल की पंक्ति का है.

ओरवेल ने अपनी बात प्रोफेस्सर बरेलवी से काफी पहले कही थी. क्या ओरवेल की ये पंक्ति प्रोफेसर साब के शेर की प्रेरना है? अब ये तो वही बता सकते हैं.

मतलब इसका ये है, के दुनिया में जो भी कहा जा सकता है, वो कहा जा चूका है. आप बस इतना कर सकते हैं को उसी बात को अपने अंदाज़ में कह सकते हैं. और अपने अंदाज़ में प्रोफेसर बरेलवी ने ये बात खूब कही है.

अब GST को ही ले लीजिये…
Prof._Wasim_Barelvi_(2)

What a Slowdown in Retail Loans Tell Us About a Slowing Economy

In the recent past a lot has been written about the overall slowdown in bank lending. Take a look at Figure 1. It essentially tells us about the loans given out by banks during the period between May 2016 and May 2017, and May 2015 and May 2016, before that.

Let’s start with non-food credit. These are the loans given out by banks after we have adjusted for food credit or loans given to the Food Corporation of India and other state procurement agencies, for buying rice and wheat directly from farmers at the minimum support price (MSP) for the public distribution system.

Figure 1:

Type of Loan Total Loans Given Between May 2016 and May 2017 (in Rs Crore) Total Loans Given Between May 2015 and May 2016 (in Rs Crore)
Non-Food Credit 4,22,001 6,25,975
Loans to industry -56,455 24,383
Retail Loans 1,94,553 2,27,863

Source: Reserve Bank of India 

The total amount of non-food credit given out between May 2016 and May 2017 is down by 33 per cent to Rs 4,22,001 crore, in comparison to the period between May 2015 and May 2016. Hence, there has been a huge overall slowdown in the total amount of loans given out by banks over the last one year, in comparison to the year before that.

Why has that been the case? The major reason for the same are loans to industry. Banks are in no mood to give out loans to industry. During the period May 2016 and May 2017, the total loans to industry actually shrunk by Rs 56,455 crore. This basically means that on the whole the banks did not give a single rupee of a new loan to the industry. During the period May 2015 and May 2016, banks had given fresh loans worth Rs 24,383 crore to industry, overall.

This is happening primarily because banks have run a huge amount of bad loans on loans they had given to industry in the past. As on March 31, 2017, the bad loans ratio of public sector banks when it came to lending to industry, stood at 22.3 per cent. Hence, for every Rs 100 of loan made to industry by public sector banks, Rs 22.3 had turned into a bad loan i.e. the repayment from a borrower has been due for 90 days or more.

Not surprisingly, these banks are not interested in lending to industry anymore. This has been a major reason behind the overall slowdown in lending carried out by banks, as we have seen earlier.

But one part of lending that no one seems to be talking about is retail lending carried out by banks. This primarily consists of housing loans, vehicle loans, consumer durables loans, credit card outstanding, loans against fixed deposits, etc. The assumption is that all is well on the retail loan front.

As far as bad loans are concerned, things are going well on the retail loans front. But what about the total amount of retail loans given by banks? Between May 2016 and May 2017, the total amount of retail loans given by banks stood at Rs 1,94,533 crore. This was down by around 15 per cent to the amount of retail loans given by banks between May 2015 and May 2016. This, despite the fact that interest rates on retail loans have come down dramatically in the post demonetisation era. You can get a home loan now at an interest of as low as 8.35 per cent per year.

A major reason for this slowdown in retail loans are housing loans, which form the most significant part of retail loans. Between May 2016 and May 2017, the total amount of housing loans given by banks stood at Rs 92,469 crore down by 22 per cent in comparison to the housing loans given out by banks between May 2015 and May 2016.

Lower interest rates on home loans haven’t helped much. The only explanation of this lies in the fact that high real estate prices continue to be the order of the day across the country. How do things look with vehicle loans which form a significant part of the retail loans? Between May 2016 and May 2017, banks gave out vehicle loans worth Rs 18,447 crore, 26 per cent lower than the vehicle loans given out by banks between May 2015 and May 2016.

What does this tell us? It tells us very clearly that things have deteriorated even on the retail loans front. People take on retail loans only when they are sure that they will be able to continue repaying the EMIs in the years to come (unlike corporates). The fall in the total amount of retail loans lent by banks over the last one year clearly tells us that the confidence to repay EMIs, is not very strong right now.

This is another good indicator of the overall slowdown in the Indian economy, which has happened in the post demonetisation era.

The column originally appeared in Equitymaster on July 24, 2017.

Economic Lessons from a Computer Printer

printer

A few years back when I quit business journalism to write fulltime, one of the first things I did was to buy a computer printer. This was primarily to help my reading habit, given that I can’t read long documents on a computer. Also, it helped me to print and send out invoices conveniently, instead of having to visit a shop every time I needed to send out an invoice.

Like any good Indian, I bought the cheapest branded printer that was available. It cost just Rs 3,000. It was only when I started printing stuff did I realise how expensive the printer really was. While, the printer cost just Rs 3,000, every time I bought a cartridge, it cost Rs 800-900. And cartridges kept running out at a very fast pace. At best, I could print around 130-150 pages with a single cartridge. It was only then I realised that the printer was just something the company sold, so that they could get the consumers to buy cartridges, which is where the actual money was made.

As Even Davis writes in Post Truth—Why We Have Reached Peak Bullshit and What We Can Do About it: “By keeping a headline price low, the hope is that we assume that the overall price is low… We judge the cost of a product on the headline price, so the headline price will be kept low… There are the up-front prices versus the ongoing charges. Teaser mortgage rates that become expensive later, cheap printers with expensive cartridges and cheap razors with expensive blades are all examples of the same thing.”

In fact, in some cases the consequences can be dire. One of the reasons behind the current financial crisis was the bursting of the home price bubble in the United States and other parts of the Western world. A major reason behind the bubble was the fact that the EMIs that needed to be paid on home loans had crashed dramatically because of teaser rate mortgages (or home loans as we call them in India). In a teaser rate home loan, the interest rate is much lower in the initial years, after which it goes up dramatically.

This led to a lot of people who shouldn’t have gotten a home loan in the first place getting one. The trouble was that once the high EMIs kicked in (remember it was a teaser loan with low EMIs initially) the borrowers simply did not have the money to keep repaying the loan. So, first the teaser loans led to the home prices going up. Once the EMI defaults started, it led to a price crash, which was one of the reasons which fuelled the financial crisis.

What is the bigger lesson here? As Davis writes: “We tend to make important judgements on the basis of a few key indicators, and so by manoeuvring those indicators our perception can be controlled.” Like anyone buying a printer for the first time looks just at the price (and possibly the brand). He or she doesn’t bother about the cost of running the printer over the longer term. Companies manufacturing the printer manipulate the situation by selling printers for low prices. This basically leads to people buying the printer.

Such manoeuvring also happens in other areas. As Davis writes: “We think that good magazines have good covers, so when we observe a good cover we infer that the magazine underneath will be worth buying. As long as editors understand this rule of thumb, then you can expect inordinate effort to go into the design of the cover, even to the possible detriment of the rest of the magazine.”

Anyone who has read Indian magazines over the last two decades would know that while magazine covers have improved dramatically, the same cannot be said about the articles being published.

The moral of the story is “that as long as we come to a judgement based on only a selection of the available evidence, canny communicators will have a disproportionate impact on our thinking by being selective in the evidence they put forward.”
As the old adage goes, what you see is what you get.

(The column was originally published in the Bangalore Mirror on July 26, 2017).

Who Does Low Inflation “Really” Benefit?

rupee

Every month the ministry of statistics and programme implementation declares the inflation based on the consumer price index. Inflation is essentially the rate of price rise. The inflation for the month of June 2017, came in at 1.5 per cent.

This basically meant that prices in June 2017 overall were higher by 1.5 per cent in comparison to June 2016. This is the lowest inflation that the country has seen over the period of last five years.

Hence, not surprisingly, the government moved very quickly to claim credit. Arvind Subramanian, the chief economic adviser to the ministry of finance, said: “This low, heartening number is consistent with our analysis for some time now.”

This is one of those statements that makes economics the subject that it is, where equally convincing arguments can be made from the two ends of the spectrum.

Allow me to explain.

Low inflation is heartening because the rate of price rise has come down. It needs to be understood here that low inflation does not mean lower prices. It just means that the rate of price rise has come down than in comparison to the past and that is a good thing. Or so the chief economic adviser would like us to believe.

The question is why has the rate of inflation come down? The consumer price index that is used to calculate inflation is made up of a large number of goods and services. The government tracks the prices of these goods and services across the country, in order to arrive at the inflation number.

Food and beverages constitute around 45.9 per cent of the index. Food and beverage prices fell by 1.2 per cent in June 2017 in comparison to June 2016. In fact, prices of some of the constituents like pulses and vegetables have fallen at a much faster rate than the overall rate.

The price of vegetables fell by 16.5 per cent and that of pulses fell by 21.9 per cent. Vegetables and pulses together constitute a little over 8.4 per cent of the index.

So, what does this mean? It means that the overall rate of inflation is down because food prices have actually come down. Lower food prices essentially mean that the farmers growing food, have sold what they grew at a price lower than they had in the past. Also, these lower prices do not always reach the end consumers, with middlemen taking in a bulk of the benefit.

There have been many stories in the media portraying the plight of these farmers who have had to sell their produce at lower than their cost price and face losses and get even more indebted. In fact, it is not surprising that over the last few months, there has been so much demand for loans to farmers to be waived off, all across the country.

The larger point is that if inflation has become very low then someone is not being paid as much as he was in the past. And this can be due to various reasons. In this case that someone happen to be farmers. Farmers form around half the working population. If they face losses then they are less likely to spend as much money as they had in the past. This will impact rural growth and in the process, the overall economic growth.

Hence, when Subramanian finds low inflation heartening, he ignores this line of thought totally. As Evan Davis writes in Post Truth—Why We Have Reached Peak Bullshit and What We Can Do About It: “There are certainly such things as facts, and no one should persuade you otherwise. But aside from quite banal facts (‘the sun is shining’) we always have to use judgement in deciding what is a fact and what to believe: we have to apply a judgement as to the weight of evidence in its support relative to the weight of interpretation put on it.”

The column originally appeared in the Bangalore Mirror on July 19, 2017.