Rahul Agarwal, director at Wealth Discovery, analyzes the significant movements for the brokerage firms, AMCs and MFs in 2017-18:
There have been strong inflows in equities and by way of systematic investment plans (SIPs). Will the trend continue in months to come?
At the end of FY17, SIP inflows stood at `439 billion and the total number of SIP accounts stood at 20 million. If the trend continues, FY2018 is likely to end with total SIP inflow of nearly `663 billion. Data shows that the BFSI sector has the highest asset allocation among MF investments - this figure stands around 27% as of now. Rahul Agarwal, director at Wealth Discovery, says retail investor participation in the equity markets via the SIP route has witnessed robust growth in the last couple of years, for which the main reason is spectacular returns in the equity markets over last 3 years. “Also, an average investor is more educated today about the benefits of SIP and the positives of early investments and compounding. SIP inflows have been robust so far, however if the market environment deteriorates the robust inflows might take a hit,” he adds.
The recapitalization plan in the union budget has given a clear direction to the banking industry. The NPA issues have been largely addressed and Agarwal says the revival of Indian economy would have to be well supported by the financial system, therefore the performance of the banking stocks in the long term would be good. However, the spate of recent scams has turned the sentiments against PSU banks. “I am, however, positive on the entire sector in the longer term and expect a lot of consolidation which would be a positive for the investors of all hues in this domain,” says he.
SMALL TOWN INVESTORS
Equity-oriented schemes derive 85% of their assets from individual investors including HNIs as per recent data. Investments from small towns beyond top 15 (T15) cities grew from `2.81 trillion in November-end 2016 to `4.1 trillion at the end of November 2017. Says Agarwal: “This shows robust growth in retail participation. However, acquiring investments from smaller towns still remains a challenge for a variety of reasons: lack of financial awareness, low surplus savings and lack of direct interaction with the small-town investors are few notable challenges.”
INVESTOR PROFILE CHANGE
Indian households invest in a combination of physical assets such as real estate, gold, diamonds, precious metals, and financial assets such as fixed deposits, debentures, equity, and mutual funds. Until 2014, the average Indian household held 77% of its total assets in real estate, 11% in gold, 7% in durable goods such as a vehicle or inventory for a shop, and just 5% in financial assets. Returns in the real estate segment have been negative for the most part. Also, the returns in bullions have stagnated thereby providing a solid reason for the investor to enter the equity markets either directly or through the mutual fund route. Investors have moved away from one asset class to another in recent years.
Explains Agarwal: “Falling real estate prices led to a decline in physical savings from 12.4% of the Gross National Disposable Income in 2014-15 to 10.7% in the recent past. Last year’s mutual fund data indicated that retail investors or individual investors have taken a dominant position in mutual fund investing. MF share has risen from 44.5% at the end of January 2017 to 50.6% at the end of December 2017. Individual investors primarily hold equity-oriented schemes, while institutions hold liquid and debt-oriented schemes. This shift to investing in financial products is perhaps a consequence of low returns on physical assets, it represents a behavioral shift and it’s a welcome change and overall positive for the Indian equity markets.”
STRONG IPO PIPELINE
Wealth Discovery has witnessed significant volume increase in the activities of its IPO desk this year. Investments in the primary markets through the company would be in the order of several hundred crores, says Agarwal, adding IPO commissions form a very small part (<5%) of its overall revenues. “However, good quality IPOs help us in getting new clients and offer opportunities to serve our clients with our other financial product offerings. Some 38 IPO offerings hit the primary markets in 2017, out of which 27 offered positive returns on listing,” he elaborates.
In March 2018, ICICI Securities has successfully closed its proposed Offer for Sale (OFS) and raised approximately
around `35 billion, after the issue size was trimmed by the company by roughly 12%. The QIB (qualified institutional bidders) portion was fully subscribed. Public issues of Bharat Dynamics, Hindustan Aeronautics and Mishra Dhatu Nigam have also sailed through. All 3 offerings from the government received support from LIC. Lemon Tree Hotels’ IPO to raise `10.39 billion too was fully subscribed on the last day.
Among the new listings, most successful were Salasar Techno Engineering with a listing gain of 143.1%, Astron Paper & Board with 141.5% gains and Avenue Supermarts with 114.6%. Says Agarwal: “The strength in the stock markets has enthused promoters for fresh round of fund raising. A strong pipeline of draft prospectus filed with market regulator SEBI indicates that calendar year 2018 would be busy year in terms of IPOs. In 2018, we have already seen 6 IPO listing till date, Apollo Micro Systems had the highest listing returns of 68%. It is expected that if the market sentiment remains positive we can expect atleast 55 new IPO listings in 2018.
BROKERAGE, MFS TO GAIN
Agarwal says the union budget 2018-19 was geared towards addressing two key aspects of the economy - the agrarian crisis and rural distress. “As such there were no specific sops for the MFs or the financial industry in general. In fact, some of the provisions in the budget regarding Long Term Capital Gains (LTCG) are detrimental to the growth of financial services in general. However, the financial services, particularly the brokerage industry, MFs would benefit indirectly through a robust economy, all key indicators point towards the revival of the economic cycle, major structural reforms in GST, demonetization, opening up of Foreign Direct Investment in key areas and an overall push on manufacturing would help the economy in general which will be reflected in corporate earnings and increased retail participation in the primary and secondary financial markets,” says he.
The financial services industry in general and stock broking in particular has a very high compliance burden, the reporting and auditing requirements as such are cumbersome and prohibitive from business perspective. Numerous regulatory enhancements and changes have been implemented in the Industry, which are always geared towards protecting the interest of the investors. “From the regulators perspective, some of the notable changes are the implementation of the Enhanced Supervision Mechanism under which variety of functionalities have come under intense scrutiny, stringent adherence to the KYC procedure, revision and implementation of the PMLA policies and risk-based supervision mechanism. The regulatory environment is expected to continue to become more stringent in the wake of some recent scams at some leading brokerage houses. From a company’s perspective we welcome steps that bring more transparency to the business and safeguards that protect our client’s interests,” says Agarwal.
OUTLOOK IS POSITIVE
He is of the view that the outlook for the AMCs, brokerage firms and MF industry is positive in both near term and long term. However, a lot of structural changes are expected in the industry. The fee structure of the AMCs is expected to become more transparent and simpler and overall burden to the client in terms of fees will come down. The size of the AMCs is expected to grow, as the forecast for retail participation in the MF industry remain strong and bullish.
He predicts: “The brokerage industry is going to witness a lot of consolidation as higher compliance costs and lower revenues would push a lot of smaller players into the lap of bigger players. The advent of discount broking has put existing brokerage revenues under strain and this opens up a lot of room for innovation, niche products and technology driven enterprise. Overall the outlook is rosy for the investor as well as the players because the size of the industry is expected to grow multifold as more and more retail investment in the primary and secondary market comes in. It is important to remember that all this will come true if the equity markets remain supportive, vibrant and buoyant. Deep corrections, heightened volatility, and extended periods of low returns are some of the scenarios in which the industry could suffer.”
rahul Agarwal predicts the brokerage industry & MFs would benefit indirectly because of a robust economy
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