Raamdeo Agrawal, chairman, Motilal Oswal Financial Services is extremely bullish on the market due to rising incomes and participation. However, he is a more than a tad worried about speculation amid retail investors. He tells Siddhant Mishra & Joydeep Ghosh that regulators should ensure that there is more supply of papers through divestment and reduction in minimum shareholding to keep a check on valuations. Excerpts:
Where do you see the markets heading towards in the short-term?
Over the next year, things will be better. Right now, the only worry is that the markets are overheated due to unprecedented flows. I hope they don’t stay that way.
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The good news is that demat account registrations have touched 3 million a month since the Covid phase, and we’re about to reach a total of 130 million. This could rise to 250 million by 2027-2028 (2 million a month).
So, there is rising incomes as well as rising participation, and for the first time, entrepreneurs have real access to equity, which was lacking earlier.
The strategy needs to be — first take the secondary market up, after which it will trickle down to the unlisted market, then to IPOs, etc.
There will be demand for papers – which will come from foreign institutional investors (FIIs) who may want to disinvest, and from promoters. FIIs are not buying, but selling at the net margin. Institutional players like promoters and PEs are also indulging in massive block deals. Primary market activity is in full swing. Promoters are free to sell. Any company listed and successful will have unlimited access to capital for ongoing projects. They can sell the stake to raise funds instead of going to banks.
Overall, DIIs are on a one-way street, and will keep buying for the next five years. FIIs are anybody’s guess but they have sold only five times in the last 30 years. They are so underweight India that they cannot afford to go further underweight. If they don’t buy big, they won’t be big sellers.
How will India’s inclusion in the global bond index impact stock market?
They are two different buckets globally, hence there is no conflict. If the yield drops from (say) 7.1% to 6.5%, then the equity valuation of India will rise as the discounting rate goes down. There will be much less volatility in the currency itself. This is for the first time that global capital markets on the debt side are getting integrated at some level, and many other indices may follow suit if the experience is good.
How much is the Chinese uncertainty helping India, with EM funds diverting money to India instead?
There seems to be EM funds ex-China that are shaping up abroad, which are at a formative stage. But there has been no major impact on net flows, which are still negative.
A major reason is that India remains the most expensive market in the world. This is where Sebi and other authorities have a duty to supply the market with good quality paper, be it PSU divestment, reduction of minimum shareholding, etc. This is the time money should move from secondary to primary market. We should be able to supply $15-20 billion per year for capital formation for new projects.
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There are fears that many new investors are getting into unchartered territory, such as speculation on options etc.
Good performance leads to more speculation, and lower speculation leads to good performance. Say the market drops by 10% overnight, a lot of traders will get wiped out as the losses will be massive. What retail investors are doing is writing options and collecting the premium. A lot of people are making a career out of it. What they don’t realise is that this is an expensive proposition.
This trend got out of hand after Covid, when the Nifty fell from 12,000 to 8,000. Since then, it’s been one-way traffic and the index has now touched 20,000. Those who wrote options have taken the money home. One can’t tell investors not to do what works for them.
What the regulators can do is to make norms for stringent, like imposing higher transaction charges. In some markets, you need a minimum qualification to speculate. For instance, the minimum subscription for AIFs is Rs 1 crore and Rs 50 lakh for PMS. This will help cut down the euphoria and unreasonable speculations. In speculation, only four-five make money and 95 will lose out. This is an unhealthy culture for the long term. Investors end up blaming the brokers and the system but don’t realise the mistakes they’ve made.
What potential for value unlocking do you see in PSU stocks?
They are dominant players in their own field, and are Fortune 500 companies. However, stock markets are all about terminal value. If you can’t predict, there is no ‘terminal value’, and hence the present value goes for a toss. Unknowingly and unintentionally they have destroyed the value as predictability is gone. The private sector, on the other hand, offers the scope to predict, by showing projections. The government has to set a story before selling it. The focus of the government should be on allowing companies to run on their own.
Two key developments are expected to happen in the stock market – extension of trading hours and instant settlement. What are your views about them?
For us, extending hours would be a good development because our income will increase on a pro-rata basis. Staff costs and logistics are not a challenge as is being touted, because the extra income will help in taking care of the extra resources required. Revenue potential will go up.
Instant settlement is brilliant for investors but liquidity may dry up and this may make prices volatile.
Key threats to this growth trajectory?
Oil price is the major one, as India is very energy-intensive and growth will be energy-intensive. If crude touches triple digits, it will lead to a spike in inflation and the government is taking immense steps to control inflation. So if they can’t control inflation they will put restrictions on economic growth. This could put stress on the economy for an extended period. Corporate profits will also be hit.
Markets are also pricey and will be impacted by any such development. Ultimately, corporate profits will be hit the most.
