The country’s equity markets seem to depict strong volatility. However, they remain among the top-performing zones globally. S A Narayan, managing director, Kotak Securities, spoke with Akash Joshi and Udita Lal of FE on the state of the markets and shape of things to come. Experts
So with the markets improving, what is the outlook at the moment?
It is much better obviously. However, I don’t think there’s strong retail participation. I think Indians have missed out. Indians have made money only on stocks not sold. Not many have bought with conviction or built portfolio. So, you see the mutual fund net collections in the Indian scenario are very low. As the markets keep going up, we seem to be booking profit. Indian investors are very cautious. More seems to be driven by easy money available internationally. The only place it has been sticky is insurance.
Do you see international liquidity drying up in the near future?
I think there is time for it to dry up. The next big question the world will be asking is how do we get out of this. But I don’t think it has come to a point where anybody is comfortable with that. Will it be a concerted strategy by all developed economies or will each do it the way it feels is right because when the countries acted together on infusing liquidity, all of them had the same problem.
But that cannot be said for all of them coming out may be in the same pace or manner. Australia was the first one to start showing signs of recovery. I think India will start soon. But for us, it will be relevant when the US and Europe show signs of recovery. I think in three or four months, I see nothing being done. All of them still don’t want to take a call now. Obviously, it bothers them that a new asset bubble is coming in shape globally both in the commodity and equity side because of easy availability of liquidity. Regulators are worried because every bubble cracks in a big way.
There are a lot of traders still complaining about cost of compliance and the cost of trading, especially with the STT. Is that really so impairing?
STT is of course costly but from where we went to where we are today, you obviously increased STT and we made it, one because it is deductible from the tax to have an expense and two it is more affecting those who are arbitraged. Whereas, if I am an FII, it makes no difference to me.
The locals are at a disadvantage against FIIs. So, to that extent, it is unfair to make locals at par with FIIs when it is allowed. An arbitrage opportunity which could be exciting for an FII cannot be hit by a local because his cost structure is much higher. Third, obviously FIIs enjoy added advantage of being able to raise money at almost zero percent. So, if there is an arbitrage in the market at say 6 or 7%, an FII will definitely hit and be happy with it because it makes 4 to 5% spread but the locals cannot. So, to that extent it is not fair on the locals.
Where do you see the market headed in 2010?
Up to March, we will be reasonably okay. It will continue to focus on pullback of liquidity. I believe volatility will be very high in 2010.
From the Indian point of view, the worry is whether oil prices will be around $80 per barrel or will it touch the $100 range. Of course, we have a little bit advantage here because the rupee is strengthening over the dollar. But if the oil substantiates at the same level, it might create a problem.
By April-May-June you will be more or less clear on the US recovery story. The clarity will help because if there is recovery, technically the world starts authorising new consumer base to start selling. Recovery in Europe will take more time. What we are looking for is the exact time the excess liquidity is absorbed back by the markets.
So with the markets improving, what is the outlook at the moment?
It is much better obviously. However, I don’t think there’s strong retail participation. I think Indians have missed out. Indians have made money only on stocks not sold. Not many have bought with conviction or built portfolio. So, you see the mutual fund net collections in the Indian scenario are very low. As the markets keep going up, we seem to be booking profit. Indian investors are very cautious. More seems to be driven by easy money available internationally. The only place it has been sticky is insurance.
Do you see international liquidity drying up in the near future?
I think there is time for it to dry up. The next big question the world will be asking is how do we get out of this. But I don’t think it has come to a point where anybody is comfortable with that. Will it be a concerted strategy by all developed economies or will each do it the way it feels is right because when the countries acted together on infusing liquidity, all of them had the same problem.
But that cannot be said for all of them coming out may be in the same pace or manner. Australia was the first one to start showing signs of recovery. I think India will start soon. But for us, it will be relevant when the US and Europe show signs of recovery. I think in three or four months, I see nothing being done. All of them still don’t want to take a call now. Obviously, it bothers them that a new asset bubble is coming in shape globally both in the commodity and equity side because of easy availability of liquidity. Regulators are worried because every bubble cracks in a big way.
There are a lot of traders still complaining about cost of compliance and the cost of trading, especially with the STT. Is that really so impairing?
STT is of course costly but from where we went to where we are today, you obviously increased STT and we made it, one because it is deductible from the tax to have an expense and two it is more affecting those who are arbitraged. Whereas, if I am an FII, it makes no difference to me.
The locals are at a disadvantage against FIIs. So, to that extent, it is unfair to make locals at par with FIIs when it is allowed. An arbitrage opportunity which could be exciting for an FII cannot be hit by a local because his cost structure is much higher. Third, obviously FIIs enjoy added advantage of being able to raise money at almost zero percent. So, if there is an arbitrage in the market at say 6 or 7%, an FII will definitely hit and be happy with it because it makes 4 to 5% spread but the locals cannot. So, to that extent it is not fair on the locals.
Where do you see the market headed in 2010?
Up to March, we will be reasonably okay. It will continue to focus on pullback of liquidity. I believe volatility will be very high in 2010.
From the Indian point of view, the worry is whether oil prices will be around $80 per barrel or will it touch the $100 range. Of course, we have a little bit advantage here because the rupee is strengthening over the dollar. But if the oil substantiates at the same level, it might create a problem.
By April-May-June you will be more or less clear on the US recovery story. The clarity will help because if there is recovery, technically the world starts authorising new consumer base to start selling. Recovery in Europe will take more time. What we are looking for is the exact time the excess liquidity is absorbed back by the markets.
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