India’s institutional asset base is growing. A rapidly growing economy has fed its pension funds, insurers and mutual funds with a steady pipeline of net asset inflows.

But these institutional investors now face some challenges: this year will see a set of political elections, which could raise market volatility. Meanwhile, there could be a spate of new stock supply, courtesy of new listings and government privatisations. 

The asset base of the country's asset owners looks set to keep rising in the months and years to come. The financial savings of Indian households—the most important source of funds for investment in the economy—climbed from 7.2% of gross disposable national income at the end of March 2013 to 8.1% at the end of March this year, according to the RBI’s annual report for the financial year to March 31, 2017. 

Indians have traditionally had a long running love affair with gold and property, but weaker gold prices and moderating house prices have led them to consider other options. Extra household savings have increasingly flowed into bank deposits, life insurance and mutual funds, even as the public’s currency holdings dropped, after the banning of Rs500 and Rs1,000 notes in November 2016, the report said.

Mutual fund and insurance industries have been key beneficiaries. The government wants to expand mass-market health, life, personal accident and agricultural schemes, and a Willis Towers Watson report on Asian Insurance Markets 2018 noted India’s insurance industry grew by 17% in terms of premia in 2017. The Insurance Regulatory and Development Authority of India said the country’s insurance industry had $84 billion of assets under management as of the end of March last year.

The mutual fund industry has also grown quickly. It hit a high of Rs21.36 trillion ($327 billion) in assets under management at the end of March 2018, a five-fold increase from Rs7 trillion at the end of March 2013, the Association of Mutual Funds in India said. 

Local pension funds have also seen assets rise. Willis Towers Watson’s global pension asset study for 2018 noted that Indian pension fund assets reached $120 billion at the end of 2017, a compound annual growth rate of 8.8% over the previous five years, versus a 4.2% global average.

With growing assets, there has been growing demand for local stocks. However, India's asset owners could face some challenges in sourcing enough suitable stocks. 

STOCK SUPPLY

Local institutions typically invest only in highly liquid and large to mid-cap stocks. India's National Pension System, for instance, can only buy stocks in companies with a market capitalisation of at least Rs50 billion (about $765 million) and that are traded in the futures and options market. That’s around 300 stocks.

“Anecdotally, I have heard some fund managers say that the outstanding stock of good quality stocks is not enough and that they are running out of stocks to pick,” said Amit Gopal, managing director of India Life Capital (ILC), which advises pension trusts aggregating Rs280 billion ($4.2 billion).

Anurag Jain, chief investment officer at Canara HSBC Oriental Bank of Commerce Life Insurance Company, added that he felt finding stocks at attractive valuations to generate competitive returns was the “biggest challenge”. 

This could change as pent-up demand entices more companies to market.

Indian companies raised a record $11.6 billion in 153 Initial public offerings (IPOs) in 2017 due to strong investor appetite, according to EY. And in the first three months of this year 14 IPOs racked up $2.8 billion, according to Prime Database (PD). That compares to five listings raising $630 million over the same period of 2017.

“There have been some encouraging developments in the IPO market, and the government is also planning on offloading some stakes in state-owned companies,” noted Neelkanth Mishra, India strategist at Credit Suisse. 

Encouragingly, some non-financial firms have begun listing, expanding on the dominance of financial firm IPOs in 2017, he added. Some upcoming IPOs will come from fast-growing sectors such as asset management, discretionary consumption, engineering exports, infrastructure and renewable energy.

The government has also set an ambitious disinvestment target of around $12 billion for the 12 months to March 2019, by offloading investment stakes in companies. Some of these offerings could attract institutional investors, added PD’s Haldea. 

However, this flow of deals will likely hinge on market volatility, and India’s political outlook. 

Amid a less benign market outlook, India’s institutional investors will need to decide whether stocks are an integral part of a diversified portfolio or just a quick speculative investment—like their foreign institutional peers. 

Click here to read the first part of this magazine feature from the April/May 2018 edition of AsianInvestor.