The recent global slowdown (while one is still not sure whether it is completely over or not, there are no doubts at all on its global impact) saw severe constriction in the amount of liquidity in the economic systems across the world. The stock markets tanking and disposable income levels getting reduced was visible throughout the world. What was not as visible was what happened to the liquidity that was available.

Typically in India, there are a few standard options for deploying savings. The stock market, mutual funds, real estate, gold and bank deposits are the most preferred options in this country. During the recession, the real estate sector was one of the worst affected and so, it is safe to assume that not too many fresh funds went into it. That brings us to gold. Gold was one of the few bright spots (if one might call it that) of the recession; with investors making a beeline for the yellow metal and thereby keeping its price on an upward trajectory in an otherwise downward spiraling market.

Talking about bank deposits, what happened to bank deposits during this period? Did they take a hit? And how much? SMC Capital consolidated some data which proves the opposite. Bank deposits actually maintained their steady growth rate right through the tough times.

When there is fear, bank deposit levels go up, and when there is optimism, market cap levels go up -Jagannadham Thunuguntla Equity Head, SMC Capitals

The first graph depicts the changes in market capitalization at the Bombay Stock Exchange and the aggregate growth in bank deposits from January 2007 to August2009; a period which covers the boom before the bust, the bust itself and the coming-out period.

As can be seen, the BSE market capitalization seesawed like a sine wave during this period, reflecting the turbulence of those times. According to the company’s analysis, “By the peak of the bull market, that is by December 2007, the BSE market capitalization was 2.35 times the total deposits held by all scheduled banks in India. And by the time the markets touched the bottom in February 2009, the market capitalization level had fallen to just 74 percent of all bank deposits (which itself had grown during the period).

All this while, the bank graph kept growing steadily, which seems contrary to the expectations. In a declining economy, with surplus cash in the system getting tight, bank deposits should also be affected. Right? In order to explain this anomaly, we need to consider the following. First of all, the Indian economy was not in a recession. India was still growing, albeit at a slower rate. So, there was surplus being generated in the system. All these surpluses, instead of heading towards the capital markets, made their way to safer options of bank deposits! It is also safe to assume that what ever cash could exit out of troubled asset classes like real estate and the capital markets also made their way to the safe havens of the banks! According to Jagannadham Tunuguntla, this is a classic example of how far optimism affects fund flows.

Before we finish this piece, it may be pertinent to look at one more data set – the equity mutual funds. Assets managed by mutual funds form only a small percent of market capitalization of the stock exchanges. Needless to say, they also show the same volatility as the share markets themselves!

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written by bob, March 11, 2010

interesting for everyone

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