The Hindu Business Line : ‘Liquidity and risk appetite driving markets’

While there are a large number of parameters that influence the movement of the market usually in any given period, one or two aspects tend to dominate the sentiment. You can call them the theme of that period.

MADHABI PURI BUCH, MD AND CEO, ICICI SECURITIES

Lokeshwarri S.K.

Vidya Bala

Parameters such as the volatility index or the contraction in spreads as measured by the difference between the three-month treasury and the three-month Libor all appear to indicate that the risk appetite has gone up, says Ms Madhabi Puri Buch, MD and CEO, ICICI Securities. She therefore feels that the current stock market rally to be driven by increased risk appetite and improved liquidity conditions than any sudden change in fundamentals. In an interview with Business Line, Ms Puri discussed the company’s growth in a tough market as well as her perception of the current rally.

Excerpts from the interview:

In the bear market of the last one year has ICICI Securities and the brokerage industry at large lost clients or seen closure of demat accounts?

For the market as a whole, we need to look at two categories of demat accounts. One category was opened just before the mega IPO issues, when people who were not equity investors until then, opened demat accounts. They were primary market investors and not secondary market investors. FY08 was a very robust year for IPOs. Many of the demat accounts at that time were also offered free of cost by brokers. A year later, many people had sold their holdings but the demat charges were debited to their accounts. Therefore many of them chose to close their accounts. This was one of the primary drivers of shutting of accounts.

There was also a secondary driver in the form of modification in guidelines regarding joint holding of accounts. This also resulted in first holders consolidating various demat accounts. Third, the requirement of PAN number submission also resulted in closure of accounts.

For ICICI Direct specifically, we were actually adding demat accounts net of such closures. In short, our market share is increasing. In terms of the regular customer acquisition (not IPO related) we have seen very steady growth over the years and have not seen any significant dip in FY09 compared to the previous year.

Has such growth kept pace with previous years?

On a gross basis our customer acquisition has kept pace with the previous years. On a net basis we are net positive while the industry as a whole has been net negative for some months.

How do you perceive the current rally?

Our view is that it is inappropriate to label a rally as a bear or a bull rally, because many of the rules that operated until now have been re-written. And when one labels something, one implies that one can predict what is to come. If you say that it is a bull rally then there is this expectation that it will be sustained. What is happening is that there has been a certain amount of increase in risk appetite internationally which can be seen through the risk indicators.

If you see the VIX, which is the volatility index, you see that the risk appetite has gone up. If you look at the contraction in spreads as measured by the difference between the three-month treasury and the three-month LIBOR again you see that the risk appetite has gone up.

So clearly there is a movement in the markets to that extent; plus all the stimulus packages which have been given have created liquidity in the system.

Further, on a relative scale, India certainly has demonstrated that it has a more robust economy, a large growth engine which is domestic and a stable banking and financial system.

So that makes it an attractive destination amongst emerging economies. At the same time, tomorrow, what events will unfold is impossible to predict. This rally is based more on increasing risk appetite and liquidity and not so much on the basis of fundamentals.

Do you see global funds that had moved to US treasury and gold coming back to the emerging markets on the back of increased risk appetite?

I shall base my answer on a recent conference that ICICI Securities conducted in Singapore in early March. We had over 90 fund houses represented there. The clear takeaway for me was that the level of interest in India continues to be very high; that people have the funds and are waiting for a good opportunity, not only people who have an existing exposure to India but also people who have not so far had any exposures in India. They too are willing to look at our country.

Therefore in some ways, what we are seeing in the markets today is a manifestation of what we saw there, which is that liquidity is available to a certain extent. India allocation is not a big issue and, based on the timing of the market, money can well come in.

But, at the end of the day, we must understand that many of the funds are assessed on the basis of performance relative to the benchmarks. That is why we see that investors come together and go together because when the benchmark moves they have no option but to move with the benchmark.

The numbers on the economic front — high fiscal deficit, government’s large borrowing programme, plunging exports, dismal US job data — all continue to be bleak. How long do you think these numbers will influence the stock markets?

Be it the equity or debt market, while there are a large number of parameters that influence the movement of the market usually in any given period, there are one or two aspects which dominate the sentiment. You can call them the theme of that period.

For instance, the Government’s borrowing programme resulting from the deficit had an impact on the fixed income market – it took the 10-year G-Sec yield all the way up to 7 per cent.

But having said that, given the fact that the liquidity in the system is very comfortable, what you are seeing is that the yield is back to 6 per cent. So today, for the fixed income market, the government’s borrowing programme is the theme and other factors such as inflation would be considered tertiary. But inflation was certainly the theme when it was rising and was at 6 per cent.

The theory is that the stock market predicts the real economy and, on an average, the market starts moving up or down roughly six months before you see the impact in the real economy.

So, if the unemployment data in the US is not looking very good but the markets are rallying, one view could be that the expectation is that unemployment has bottomed out and that employment would go up from here probably six months later and that like in every other cycle it is possible that the stock markets have moved ahead of the real economy.

You mentioned that the fundamentals have not changed. Have the series of interest rate cuts and income boosts from the Pay Commission not brought about fundamental changes?

Yes, of course, they have had an impact. If you look at sales in the auto sector, a large part of it is attributed to pent-up demand, which found an outlet with the Pay Commission payments. There is no doubt that the effect of the stimulus packages, the Pay Commission and, hopefully, the effect of a good rabi season, will all have an impact and this is already showing.

But what I would like to emphasise is that when I say that fundamentals have not changed, I mean that this information is not new. It was known even a month ago….two months ago…and had already been discounted in the markets.

So it is not as though anything has happened in the last few weeks, which is a surprise. What has changed is the increase in the risk appetite and the liquidity position internationally.

Given that there are lot of macro factors having a bearing on almost every asset class, which class of asset do you expect to perform better?

We would certainly advise all our customers to take a diversified portfolio approach. A bet on any one asset class is not what we would recommend. We definitely recommend equities as a growth-oriented asset class in the long run. Some amount in relatively safe assets such as gold, some in property and some in liquid cash is also recommended.

Do you see any relief for companies on the interest rate front this earnings season?

Interest rates have come off. As I said, the 10-year yields have come off from 7 per cent to 6 per cent. However, there will be a lag before the effect is felt in the P&Ls of corporates. Just like commodity prices. If you are already sitting on a certain amount of inventory, then you do not get any immediate effect when the commodity prices drop. Our assessment is that we would probably start seeing a material impact of lower interest rates in about three to six months from now.

Are the changes made to Accounting Standard 11 for foreign exchange translation desirable from an investor’s perspective?

I would say that investors, who look at the performance of companies very carefully, often look at the cash generation of the business in addition to the accounting profit. And that is perhaps a good thing.

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