Trade winds

Indians are falling in love with equity markets, but they must keep their eyes open


Saurabh Arora always invested in real estate. He had tried trading stocks, but burnt his fingers during the 2008 financial crisis and had stayed away ever since. The Delhiite, however, recently started buying blue chip stocks. At a time when the economy has taken a knock from the Covid-19 pandemic, what made Arora take the plunge once again?

“I have followed stock markets for some time and done a lot of reading,” he said. “Now I am buying stocks that I am confident will ride the crisis and do well in the long term.”

We have seen strong momentum in account opening and market share gains across cash, derivative and advisory products ­—Ajay Menon, CEO, broking and distribution division, Motilal Oswal Financial Service
Falling interest rates on savings raise the attractiveness of equities —Dhiraj Relli, MD and CEO, HDFC Securities
When other asset classes are not doing well, it makes more sense to invest in equity market, where returns in the longer period have shown to be better —Ravi Kumar, cofounder and CEO, Upstox
As long as there is going to be an easy money policy, a lot of liquidity will come into the markets and will chase equities from emerging markets —Avinash Gorakshakar, director, research, ProfitMart Securities

Some 500km away from Delhi, in Kota, Rajasthan, medical practitioner M.S. Suri, 65, also has been learning the tricks of the trade in equity investing. At an age when most people would be content with bank deposits or debt funds, Suri is waiting patiently for the markets to correct themselves and then buy again. “Earlier, I was also a conservative investor,” he said. “But now I have changed the strategy after I got in touch with financial advisers. Buying stocks has become a hobby for me. I sold some recently, and I am now waiting for a correction so that I can re-enter and invest in pharmaceuticals, an area I understand well, as well as consumer goods and good quality infrastructure companies.”

Typically traditional investors, Indians always considered equity markets risky, and therefore parked their money in bank deposits or other fixed interest bearing instruments like small savings certificates and public provident fund. Buying real estate and gold were other preferred avenues.

That, however, is changing, as many of them have woken up in the past few years to the advantages of systematically investing in mutual funds. Now they are venturing into the capital market and buying stocks. The number of people opening demat accounts and starting trading in equity has steadily been growing. That number jumped a few notches up since the stocks crashed in March and the pandemic forced people to stay at home.

Ajay Menon Ajay Menon

The average daily turnover of stock exchanges in June was Rs61,395 crore, a 69 per cent jump from the average daily turnover of Rs36,432 crore recorded in the year that ended in March 2020.

Nithin Kamath, cofounder and CEO of Zerodha, India’s largest online stock broking firm, said it was adding 70,000 to one lakh new customers a month even before the pandemic struck. In the past few months, it added 1.5 lakh to two lakh new customers a month. Upstox, another online broking firm, has seen its customer base jump from one lakh to 10 lakh in two years. Ravi Kumar, its cofounder and CEO, said it hoped to double that in the next six months.

The growth is not restricted to online brokerages. Motilal Oswal Financial Services is now averaging around 5.5 lakh account openings a month. Angel Broking has recorded its highest monthly client additions, about a lakh, since the lockdown started.

Ajay Menon, CEO of broking and distribution division of Motilal Oswal Financial Services, said a large number of clients who open accounts are first-time investors and many of them are coming from tier II and tier III towns.

Dhiraj Relli Dhiraj Relli

These first-time investors, interestingly, are confidently venturing into the derivatives market and options strategies. Volumes in the derivatives segment rose 22 per cent year-on-year in June. “Motilal Oswal has seen strong momentum in account opening and market share gains across cash, derivative and advisory products,” said Menon. “We think this trend may continue as clients have got hooked onto digital platforms, the corporate sector is looking more confident of the revival and global markets have rebounded, wiping out the entire loss post Covid.”

A big reason behind the growing interest in stocks is the fall in interest rates. Interest rates have been reduced all over the world as central banks and governments have pumped in money in the form of stimulus measures. In India, the interest rate at which the Reserve Bank lends to banks (repo) is 4 per cent, the lowest in two decades.

This has in turn led to lenders slashing their deposit rates. State Bank of India is now paying an interest rate of just 2.7 per cent on its savings bank deposit accounts, and the highest term deposit rate for general public is 5.4 per cent. HDFC Bank is paying 3 per cent interest on savings deposits up to 150 lakh and fixed deposit rates max out at 5.50 per cent. “Falling interest rates on savings raise the attractiveness of equities,” said Dhiraj Relli, MD and CEO of HDFC Securities. As a large number of people have been working from home in the past few months, many of them are dabbling in equities during their spare time and see it as an additional source of income.

Ravi Kumar Ravi Kumar

“The Indian customer is an intelligent individual and will move money where he sees the best return,” said Ravi Kumar. “When other asset classes are not doing well, it makes more sense to invest in equity market, where returns in the longer period have shown to be better.”

In the last decade, Indians invested heavily in property. In the recent years, however, especially after demonetisation, the residential real estate market has been subdued. According to consulting firm Knight Frank, between January and June, house sales in India’s top eight cities halved to 59,538 units, a ten-year low. “A lot of people realised that all of a sudden they couldn’t sell their gold or land quickly in this environment to meet their short-term financial needs and that they should be keeping their savings instead in financial assets, which are more liquid and you could have access to money on a rainy day,” said Kumar.

The emergence of new platforms makes it easy to buy stocks listed not just in India, but also the blue chip companies listed globally. Upstox, for instance, is launching global investing on its platform that will allow buying stocks from 60 exchanges.

As the stocks started looking attractive when the equity markets crashed in March, there was a huge inflow of investors. In the same period, major economies rolled out trillions of dollars in stimuli. The surge in retail investments on the one hand, and the huge stimuli on the other, have led to one of the fastest rebound in equity markets. The Sensex almost touched the 38,500 levels on July 28, just four months after it hit a low of 25,638.90 on March 24.

Avinash Gorakshakar Avinash Gorakshakar

The biggest question, however, is how long will this rally last, given that the pandemic is showing no signs of subduing and several sectors remain badly impacted. While the rating agency Fitch expects India’s GDP to contract 5 per cent this year, another agency, Nomura, sees the economy shrinking by 6.1 per cent. Given this uncertainty, should investors continue to pour money into equities?

Avinash Gorakshakar, director, research, at ProfitMart Securities, said the markets were not looking at the fundamentals at all and the rally was purely liquidity driven. “The central banks are driving the markets. As long as there is going to be an easy money policy, a lot of liquidity will come into the markets and will chase equities from emerging markets.”

If investors want to continue investing directly in equity, then choosing the right stocks is crucial at all times; more so when overall economic uncertainties persist. “There is no better wealth creation tool than equity. But, never compromise on quality,” said Anant Laddha, a certified financial planner and founder of advisory platform Invest Aaj for Kal. “You should always go for growth stocks, focus on fundamentals and not just look out for stocks that are cheaply available.”

But, many investors are splurging cash on penny stocks hoping to make a quick buck. For instance, shares of a bankrupt telecom company have soared 350 per cent since June 1. “This is a trading market, where everybody just wants to play the
momentum. There are many companies, which have poor balance sheets, no corporate governance. There are a category of investors who are willing to take the extra risk. But, once a fall comes, these will be the first ones to get destroyed,” warned Gorakshakar.

There are worries ahead. The RBI’s Financial Stability Report has warned that gross non-performing assets could surge to 12.5 per cent by March 2021 from 8.5 per cent in March 2020. Several sectors like airlines, retail and infrastructure have been hit hard and there are no turnaround signs yet. Public sector banks may also need another round of government recapitalisation given the pressure on their balance sheets. Even large companies, like Maruti Suzuki, reported a loss in the June quarter. “At the current valuations, you have to be very selective,” said Gorakshakar. “I don’t think today is the time that you can go out and buy confidently.”