Markets

‘Deep discount broking is here to stay’

V.Sajeev Kumar Kochi | Updated on June 05, 2018

CJ GEORGE, MD, Geojit Financial Services   -  PAUL NORONHA

 

“Caution” is his key word when it comes to stock market and broking, the industry in which he made his mark. CJ George, Managing Director of Geojit Financial Services — the man with the Midas touch in the broking industry — advises retail investors to opt for a financial plan based on long-term mutual fund investing, rather than going for stock picking. He spoke at length on zero brokerage firms, shifting of retail investors to MFs and speculation, among others. Edited excerpts:

How is the current market situation different from your expectations a few years ago?

Although the consensus projection of Sensex target in 2014 for the succeeding five years was much higher, some unexpected major disruptions that occurred in the economy had its impact on the earnings growth, and hence, the share prices.

In the next one year, the market is expected to be volatile in nature, more due to the anxiety related to the outcome of elections in major States as well as the general election in 2019.

A number of small- and mid-cap stocks crashed in the recent past. What is your advice to retail investors?

Small- and mid-cap companies will continue to be major growth-drivers in a growing economy such as India. Growth and disrupting businesses of the future will only come from this segment, rather than from behemoths. However, one should note that every company in that bracket need not be good and lasting. Bankruptcies and failures will be higher and faster than ever before, adding to the risk profile of this segment.

Investors must be careful before investing in this segment and at the same time must consider investing some portion of their savings, depending on their risk appetite.

Retail investors should either take advice or go through MFs to invest.

 

How is competition in the form of discount broking impacting your business?

During the last five years, there have been offerings from many discount brokers in the online space and a few of them have captured the imagination of traders in a big way. Of late, even full-service brokers have started offering deep discounts through their technology platforms.

However, what is interesting is that these offerings are targeting the existing universe of day traders and speculators for whom brokerage rates matter like the Algorithm traders. Many of these traders are also compulsive traders who tend to take positions on a daily basis where securities margin and brokerage are low.

In our experience, we have seen some traders coming back to us from discount broking platforms. One of the reasons being, they tend to lose more and at a faster pace due to deep discounts in broking and thin margins for trading.

Most of the time, traders do not realise that they lose their capital not because of brokerage, which is already thin, but because of wrong trading decisions.

It is inevitable that the brokerage rates will hit new lows sooner than later on technology platforms, if they do not have any other value proposition other than transaction execution.

Nevertheless, it is pertinent to admit that deep discount broking is here to stay and will force traditional transaction execution brokerages to eventually shut shop or change the offering.

We don’t see a future for more than a few dozen brokerages in the country unless they reinvent and transform the current trading only platforms.

Geojit had identified a different value proposition in today’s highly competitive space, which is how to create wealth for clients and we are of the view that this is a more enduring strategy as clients are ready to pay commensurate commissions.

It is in the context of the rat race for lower brokerage rates that Geojit decided to stay closer to wealth-creation for retail clients, rather than wealth-destruction for them through trading.

Day trading accounts for only 7 to 8 per cent of Geojit’s total income and this has been steadily declining as a percentage of total income. In the last two years, we have been growing our advice-based business at around 80 per cent plus a year, which is expected to continue in the next few years also.

What are the headwinds facing the market in the short term?

With 2018 and 2019 being election years for important States followed by the general elections, there is a natural uncertainty in the market. Adding to this is the uncertainty on account of the recent by-poll successes of Opposition parties. Investors generally don’t like uncertainty whether it is domestic or international.

For the past many months now, the market has also been witnessing selling of portfolio investments by FPIs due to external factors such as hardening of interest rates in the US, and more recently, hardening of crude oil prices, which are big negatives for India. In short, the markets may not give significant positive returns in 2018/19.

Published on June 04, 2018

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