Jefferies traces synchronised growth pattern for equity, property investments

markets

A study by Jefferies India has indicated that property and equity investments in India can grow in tandem. The analysis specifically focuses on the inflows into equity mutual funds (MFs) during the previous property upcycle from FY04-14. Despite a significant surge in investor interest in property purchases during FY04-08, investments in the equity market remained consistently high at around 0.8 percent of market capitalisation.

When examining the percentage of housing and equity investments in relation to household savings, it becomes apparent that they typically account for 50-60 percent of savings. This suggests that an increase in one investment avenue does not necessarily lead to a decline in the other. Additionally, the recent decline in the share of gold is expected to continue in the foreseeable future.

Regarding retail flows, Jefferies India notes that while lumpsum investments have recently experienced a moderation, there is potential for a reversal in this trend due to a rise in trailing returns. In April and May 2023, net inflows into domestic mutual funds (MFs) averaged around $0.5 billion, representing an 80 percent slump over the last year.

The lumpsum component, excluding Systematic Investment Plans (SIPs), witnessed net outflows in seven out of the past 12 months. However, the magnitude of these outflows has not been significant. The report also suggests that with midcap indices reaching new highs, there is a possibility of discretionary domestic flows returning in the near future.

The performance of SIPs is highlighted as a positive factor contributing to the structural impact on the equity markets. SIPs have witnessed a year-on-year growth of 19 percent, reaching 65 million accounts. In addition to this, there has been a notable increase in flows from pension funds and insurance, with annual inflows surpassing $10 billion. Jefferies' estimates project that the structural flows from retail investors into the equity markets amount to approximately $30-35 billion annually.

Despite the potential for growth, equity investments in India constitute a relatively small portion of the overall investment landscape. Jefferies' analysis of household savings data reveals that equity holdings and flows make up less than 5 percent of both household assets and annual savings.

Jefferies emphasises that even a reallocation within the existing savings portfolio is sufficient to sustain retail flows into the market. For instance, SIPs represent only around 10 percent of the annual incremental bank deposits. Given the longer-term benefits associated with SIPs, there is potential for them to gain a larger share within the overall savings landscape.