Morgan Stanley sees return of retail investors

Domestic markets may see the return of retail investors finally as earnings from equities have turned positive in recent months, brokerage firm Morgan Stanley said.

Retail investors could become net buyers soon from being net sellers for long, it said, adding that financial savings should see a boost in the coming 24 months if the government commits itself to bringing down inflation leading to a marginal rise in real rates, which in turn will help the retail segment to remain invested.

The share of equities within that could also rise given the improving real return on equities and the starting point of equity ownership relative to fixed income, it added.

The anchoring to physical assets, especially gold, is likely to be shaken in the coming months, the report said.

Morgan Stanley said the low and negative real rates of the past four years have fuelled demand for gold and property. Gold demand has historically not been as high as it has been in the past five years.

"Now, we think real rates may continue to rise largely due to tempering of inflation - this means property and gold will give up share in total savings," it said.

The mix of equities in financial savings is driven by trailing real equity returns. Trailing returns are rising and this is good for equity flows. In addition, the other factor is the ratio of equities to fixed income, this ratio shows very high under-allocation to equities. Already, India has underlying structural factors to drive equity savings.

Choice between equities and gold is driven also by the relative returns of the two asset classes. The equities are gaining at the expense of gold and, therefore, the relative equity flows to gold could also reverse in the coming months.

While property has strong underling demand driven by nuclearisation of families, need for better housing and good affordability (house prices relative to incomes), the investment demand for homes could also come under relative pressure as households make a shift in favour of financial assets, it said.