With the market struggling to find bottom, Mr Sailav Kaji, Director — Institutional Equities & Chief Strategist, Padmakshi Financial Services, shares his views on the state of the market, economy, the broking industry et al.
Excerpts from the interview:
How do you think FIIs will behave for the rest of this calendar given that GAAR implementation has been postponed by a year?
Right now the sentiment on the FII front is hesitant in spite of GAAR being postponed due to lack of conviction on domestic macro. The long-term funds may be finding India attractive from three-year perspective but short-term funds may want to wait it out. This is resulting in flat outflow against higher outflows from other emerging markets.
What portion of trading in market currently takes place through online orders and what proportion takes place through clients dialling up their brokers?
Online trading has picked up over the last couple of years due to ease of convenience as well as availability of prices on prompt basis. But as market interest is fading, these volumes too are showing declining trends. In retail segment online volumes could account for almost 30-40 per cent of volumes.
How significant are proprietary book trades in the overall volumes?
Proprietary trades aresignificant liquidity providers in current markets where retail participation as well as domestic institution volumes are on the decline. They are trades which are mostly short-term in nature such as arbitrage or technical-analysis based. In options segment of derivatives, those trade may be constituting significant proportion, maybe 30-40 per cent of the volume as lot of Greek-based strategies are deployed in proprietary books.
What strategy are brokers adopting to increase revenue against the back-drop of falling brokerage?
Brokers are diversifying product mix by offering commodities, currencies trading with existing equities to their clients. As volatilities in those markets are higher in recent times they also provide trading opportunities. Wealth management products such as insurance and mutual fund distribution are in focus at brokerages from existing as well as new clients to boost revenues in the back drop of falling brokerages.
Do you think trading in commodity will overtake equity trading in the years to come?
We believe commodities will be a sizeable market in the years to come as globally they are very big. But unless organised players such as banks, NBFCs and MFs are allowed to trade in it, this market will lack depth to attract bigger traders. Also options have not been introduced in commodity exchanges yet. Once that happens, volumes can take a quantum leap as hedging and speculative volumes will then pick up.
How is the interest in currency futures trading?
Currency futures have been introduced so that exporters and importers can use them to hedge their exposure on a transparent platform. The liquidity can reduce the impact cost. Currently the speculative activity is very high due to higher volatility in the underlying. Over the period I anticipate this market to grow exponentially as more participants such as FIIs are allowed in this segment.
What is your advice to clients now?
As the global negatives as well as domestic challenges on macro front weighs on the market, valuations have corrected significantly. The market PE has come down to 14-15 levels. From medium-term perspective, market valuations are factoring in almost all the negative news. There could be some head-winds arising from global events. Even in that case, 14,500-15,000 levels is where marketcan attract bargain hunters who looks for returns over 15-18 months. Considering this one should start investing 20 per cent of investable funds selectively in frontline stocks.
What are retail investors doing now? Are they trading in cash or derivatives market?
Volumes in the cash market segment have declined 50-60 per cent from 2007-08 levels, showing lack of investor interest in the market. As institutional investors too are shying away, retail investors who have burnt their figures by losing almost 60 per cent of portfolio value in the last three years, with the exception of FMCG and IT sectors, are reluctant to commit fresh funds. With the prospect of market improving in next six months low, retail investors are keeping away. Some funds of retail segment have also shifted to gold ETFs as well as physical gold.
What is the take-away from the fourth quarter earnings? Which sectors would you ask your clients to invest in?
Operating margin appears to be bottoming out. Revenue growth may remain sluggish for one more quarter till clarity on monsoon emerges as well as decline in interest rates begins impacting top-line. We remain positive on FMCG, pharma and banks. Stocks in these sectors can be accumulated at current levels. For courageous long-term investors, bottom fishing in stocks from auto and capital goods such as L&T is recommended.
Do you see domestic consumption continuing to drive growth give the series of interest rate hikes carried out over the last year and the recent petrol price hike?
The petro price hike will take some time to get factored into consumption patterns. But I believe that the economy will be able to absorb 3-5 per cent hike in price without too much difficulty. The main negative right now is lack of investment in economy constrained by higher interest rates and the regulatory risk in most of the sectors such as infrastructure, oil and gas, power, telecom. Once those are addressed, structural positives will give boost to the economy. The growth in FMCG is likely to remain robust, but that alone can not sustain the overall consumption.