With interest rates going down and the real estate sector in limbo, more money is expected to flow into the stock markets, according to Nikhil Kamath, Co-founder and CIO, True Beacon and Zerodha . However, he cautions that investors should enter the markets in a measured, systematic manner without leverage and with ample diversification. Excerpts of an interaction:

With the country under lockdown, have you seen an increase in the number of new clients over the last couple of months? Do you see clients shifting to online-only brokerages, such as yours, in this period?

The fall in indices such as the Nifty 50 as a result of the Covid-19 crisis, has caught the attention of Indian retail investors, who are cognizant of the discounted valuations of blue-chip stocks, and believe this period to be a good time to enter the markets. Interest rate reductions are also playing an important part in making the stock market a more attractive option for investors to channel their investable surplus.

Zerodha has seen a significant increase in the number of new investors considering the number of accounts being opened. The month-on-month (M-o-M) growth has been close to 100 per cent for March. With the general push towards digitalisation over the last few years, the distinction between offline and online brokerage firms has become increasingly irrelevant. Most brokers now have both an online and offline presence in order to stay competitive. Given the convenience of online on-boarding processes and digital platforms, it is likely that clients will be more biased towards brokers that effectively leverage technology.

How are your clients behaving in this period? Are they trying to stay away from the market or are they enjoying the market volatility and trading more?

A majority of the new client base is cautious in their approach towards the markets. Being more risk-averse, these investors are focusing on equity as compared to trading in derivatives. Their investment horizon appears to be more long-term with individuals moving away from leveraged trading and borrowing capital for margin purposes.

Retail investors are taking advantage of the downturn in the markets by ramping up their investments in large-cap companies where they see value at the current price levels. The focus has shifted away from capitalising on short-term volatility to a more prudent three- to five-year perspective. Investors are also becoming increasingly aware that investing in equity for quick returns is not the best strategy, and a long-term approach is wise.

Have there been any payment problems over the last couple of months due to the market crash? Do you think there is any settlement risk in the Indian markets?

Most brokers have proactively reduced leverages over the last couple of months in order to reduce exposure levels in the markets. At an overall level, we have not witnessed any payment problems. The regulators have been proactive and have taken the appropriate measures required to negate any settlement risk.

However, on April 20, in a very strange turn of events, crude oil futures contracts dropped to negative levels for the first time in history. This had severe consequences, as reduced trading timings did not allow brokerage firms to react to such a big move in the international markets. As a result, commodity brokerage firms faced huge potential losses. These black swan events can definitely pose a significant risk in Indian markets.

Do you think that use of automated trading tools and algos exacerbates the market fall? Is that why stocks fell so sharply in March?

Algos and systematic trading are both useful tools to mitigate and hedge risks in a down market. Automated trading tools increase efficiency in the market while also reducing the impact costs. At the moment, 30-50 per cent of trades in India are algo-driven. In the US markets, about 90 per cent of equity futures trades, and about 80 per cent of cash equity trades are executed by algorithms without human input.

Evidently, in comparison to global peers, the share of algos in Indian markets is lower. We see the percentage in trading turnover that algos contribute to go up over the next few years.

What are your views on global markets? With the excessive stimulus by the US Fed and other central banks, has a floor been formed there?

While the Fed has introduced a range of drastic measures to counteract the effects of Covid-19, the fate of the US economy still remains relatively unclear, given the unemployment-driven collapse in consumption, in addition to significant falls in trade and investment.

In this backdrop, it is difficult to predict or call a firm bottom or a top. However, I feel valuations are fair to allocate some percentage of equities in individual portfolios. The key has to be to maintain a balanced portfolio. I would recommend 60 per cent to large-cap equity, 30 per cent to fixed income, and a 10 per cent allocation to commodities.

How much lower do you think the Indian markets can go, especially with economic growth slated to be flat to negative in FY21?

Markets are forward-looking, and most of the bad news which is already out seems to be priced in. The lockdown extension, for example, had already been discounted by the market, and the announcement did not have any incremental impact. Unanticipated news and global cues will determine market moves at either end. The economic slowdown would have been factored in by now. We will have a slowdown in growth, but any signs of a recovery will aid the markets in moving back up.

What would be your advice to investors/traders at this juncture?

It is important to be cautious, and ensure adequate liquidity for contingencies. We recommend holding a liquid component of at least 25 per cent at individual portfolio levels. With interest rates going down and the real estate sector in limbo, more money might flow into the stock markets, and the key remains to enter the markets in a measured, systematic manner without leverage and with ample diversification.

Related Topics
comment COMMENT NOW