The Dow Jones is at 22k – a real high so you think the small investor is flocking to the market, right?

Wrong. The small investor is pulling money OUT of the shares portfolio and is busy buying bonds – remember the US yields may be rising, but still gives very poor returns. Why this mega shift? Difficult to guess..but the individual investor in US is no longer wanting to believe the ‘rags to riches’ stories of the market. They younger gen is not investing in shares and the older gen is pulling out – perhaps for expenses. Since the tech boom-bust of 2000 Americans have been pulling out. They should have pulled out half a Trillion US $ from the E markets and invested in the Debt markets.

The reason for this could be many fold. A lot of money is now being ‘advised’. The advisers are using the client needs properly and withdrawing from E and reallocating to debt. It is more mathematical than emotional. A huge part of the American population is old – and they are the people who hold shares. Younger people are putting some money in ETF, but not much in direct stocks. And target-date funds, (retirement-saving portfolios that automatically do asset allocation as investors age) held almost a Trillion $ in assets!

The arithmetic is simple: If you had a target of 50% in shares and the balance in debt, when shares go up 10%, you NEED TO REBALANCE. Your financial adviser will automatically sell  shares and buy bond funds to get you back to 50%. Even earlier this was supposed to happen, but NOW the advisers are making sure that it happens. In fact it is now mechanised. So many times a month as the stock market rises some algorithm is reallocating!  Such continuous, gradual, unemotional selling may well have helped the market rise so smoothly in the US and MAY keep it from overheating.

In India on the other hand the monthly inflows into the market is gallopping at a fast clip and the way the agents are compensated there is a far greater inflow into shares. IN the non metro areas the products sold are less of debt and more of equity. This is not without its problems, but the trend is likely to continue – as long as we compensate on assets – the trail commission. The Indian market may have gone up – but you need to accept that there has been a very long lull in the market too, so some growth was inevitable. Look at the results of Indigo – 40% market share of the Indian aviation industry – is at a PEG of 1. Infra growth will fuel the index and it will be funded by rural India – or at least semi urban India. With interest rates at an all time low – equity growth is almost guaranteed.

GST implementation will be a small time short term glitch, but does not look like a deterrent to growth. The Americans are now not asking ‘should I buy Amazon’ – their advisers are TEACHING them to ask ‘do you have the right mix of debt and equity in our portfolios’. The Indians too are not asking ‘should I buy Indigo’. They are investing in ‘Balanced Funds’ – which are an euphemism for a fund with say 70%+ in equity and the balance in debt.

It is not to say that the American markets cannot collapse or that the Indian market will keep going up. It is just that the rise in US has been tempered by the withdrawal of the retail investor. It means the market is not being fuelled by the ‘dumb money’ – a term used by professionals to talk about retail money.

In India the market is well diversified – the money is coming from various parts of India. One village 100 km from Kolkatta is doing 400 sips in a balanced fund. So when the Bangalore techie withdraws money to buy a flat or a Punjab farmer invests his farm income, the market is getting to maintain its balance.

So don’t believe anyone who tells you DJ 22000 is driven by euphoric “dumb money.” That is a lie.

In India the SIP seems to be the driver for growth. Our costs need to come down fast.

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  1. Dear Sir,

    When do you think the regulator will wake up and ask AMC’s to bring the expense ratio in check ? AMC’s is not going to do this on it’s own. Regulator may be more worried about the hue & cry raised, during the Direct funds some 4 years back.

    Sanity and Common Sense is such a remote emotion for human beings.

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