Fundamentals do not support rally, says I-Sec

Fundamentals do not support rally, says I-Sec
The Hindu Business Line, June 5, 2009, Page 13

R. Yegya Narayanan, Coimbatore

The FIIs have pumped close to $4 billion into the equity markets in the past few months (which had driven the valuation up), but the fundamentals of the economy do not support the current equity valuations, according to a senior executive of ICICI Securities.

The company wants to give a push to offline trading by active traders for which it intends to expand its Active Trader Service (ATS) network.

Speaking to newspersons in Coimbatore where it opened its ATS branch, Mr T.S. Harihar, Senior Vice-President (Customer Strategy & Advisory), ICICI Securities Ltd, Mumbai, said in the last six weeks, FIIs have invested nearly $4 billion in equities that has pushed up the market. But if the rupee weakened beyond Rs 50/dollar (the exchange rate is currently around Rs 47/dollar), there could be reversal in investor sentiment since “nobody wants to keep money in a country where the currency is weak”.

Asked whether the fundamentals of the Indian economy justified the valuation, he said, “they don’t”. He said markets were not always ‘fundamental-driven’. In a bull market, people were willing to pay a higher price whereas in a bear market, the reverse was true. When Tata Steel had hit the bottom around Rs 140, there were few takers for it and now it is quoting around Rs 490. Similarly L&T dipped below Rs 600 only to bounce back to Rs 1,400-plus now.

Rallying around

When pointed out that the during early days of the current rally, analysts described it as ‘bear market rally’ or ‘relief rally’ rather than the beginning of a bull phase, Mr Harihar said these were names and none knew whether it was bear market rally or bull market rally. But historically “bull markets have never shown a ‘V’ shape return” and after falling from a peak, they never go back to the peak at one go but fall again after recovery and drift. Markets do not bottom out in a ‘V’ shape. Even during the 1930s Great Depression in the US when the bear market lasted four years, markets bounced back by 40 per cent ten times. A market correction in India was “entirely” possible but it may not go back to the earlier lows and Nifty could test the 3,500-levels from its current 4,500-level.

Questioned about indications of greater control over the how the capital markets functioned in the US and whether the old “irrational exuberance” would return or there would be more rational growth in valuations, he said “markets have always been irrational”. The market was about sentiments, which could not always be rational.

Investor types

Mr Harihar said there were three types of investors — retail customers who buy in small lots through the internet, high demat customers holding ESOP stocks/huge portfolios that they trade rarely and the active traders. It was the last segment that ICICIdirect proposed to tap.

In Coimbatore itself, there were around 75-80 very active traders and the city accounted for around 4 per cent of the daily derivative volume in 2007.This fell after the market meltdown, but has been picking up in the past two to three months.

Asked about opening a new branch in the city when many securities companies were rationalising manpower/branch network, he said when the market was in a downturn, it provided opportunities for expansion because of reasonable compensation levels and a drastic fall in rental. It was also time to expand as the market may recover in about six months.

He said ICICIdirect.com has about 82-84 per cent share of pure online trading that accounted for about 8-10 per cent of the market value. Only 15-20 per cent of daily trading volume was delivery-based and the rest was contributed by derivative and intra-day trading business. He expected the delivery-based business to remain in this range, but they offered high income because of higher brokerage charged.

Asked whether he expected the brokerage to go up in view of the market upturn, Mr Harihar said the competition was “too tough” and while the fee could be higher for small ticket purchases, for traders “it is very unlikely” that brokerage would go up. The rates, however, would not come down since many brokerages were at break-even level and they could not survive if they further cut rates.

ICICI Securities has opened ATS branches, in the past few months, in cities such as Jaipur, Pune, Kochi, Ludhiana, Indore, Rajkot and Surat and it plans to expand this network.