Brokerages breathe sigh of relief

The banks are lending more. The stocks are trading more and enquiries for investment advice are beginning to zoom. No wonder then, most investors are turning positive on the hitherto untouchable sectors — banking and financial services.

Traded volumes in stock markets touched an all-time high on Tuesday. Volumes also crossed Rs 1 lakh crore on Wednesday. This has taken the average traded volume to a healthy Rs 83,657 crore for the quarter beginning April 1, 2009. Though we are still midway into Q1FY10, this represents a 50% increase over the average traded volumes of Rs 55,403 crore recorded in the previous quarter.

Higher volumes mean more revenues for brokers as they charge a fraction of this turnover as brokerage fee.

“Not only volumes, the price and stability that has come into the market is very good for the industry. Things should see a turnaround in the next quarter for not only the broking industry but the entire financial services space, provided the right measures are announced in the Budget,” says Dinesh Thakkar, chairman, Angel Broking.

The asset management industry, which had gone into a slumber for the past 18 months with new fund offerings drying up to nil, is waking up too.

Rajiv Bajaj, MD, Bajaj Capital, a Delhi-headquartered national distributor of mutual funds, said there is definitely a huge increase in activity. “The number of investor calls has gone up five-fold. People who have invested are asking whether it is the right time to book profits. People who want to enter are asking for strategies.” 

Bajaj says the stock market rally has given a booster shot to the industry. “The NFO action has also revived. The Tata SIP fund is on and the Reliance infrastructure fund offering is opening this Monday. We are looking forward,” he says.

This optimism has encouraged most brokers and fund managers, who were underweight on financials during the global financial crisis, to review their portfolio after the UPA’s dramatic return to power at the Centre. While many are turning overweight on the sector, the rest are removing their underweight positions.

In a post election India strategy report, Morgan Stanley analysts Ridham Desai and Sheela Rathi said, “We are turning more aggressive with our model portfolio. We are reducing defensives in our portfolio and adding more cyclicals. We are going underweight on healthcare and closing underweight positions in financials and industrials.”

Morgan Stanley has in one go erased 200 bps underweight on financials they had in their portfolio. From hereon, the Morgan Stanley model portfolio will now have the same 21.6% weightage to financials as the MSCI India index.

“Financials and industrials may assume performance leadership in the short run whereas the underperformance of defensive sectors may continue,” Desai and Rathi said.
Local fund managers agree. N Sethuram, CIO, Shinsei MF, says, “The revival in fortunes of the infrastructure and real estate sectors will in turn drive the banking sector.”

IDFC-SSKI analysts Pathik Gandothra and Sameer Bhise say, “The party ain’t done yet for the financials with the impending insurance reforms and ownership reforms for private banks.” They also opine that asset quality concerns will be “HISTORY.”

One concern for investors is the amazing run many of these stocks have had in the past two months. The India Infoline stock has almost quadrupled since March 9, rising 278% to Rs 155 from Rs 41. Motilal Oswal prices have tripled, while Emkay Global, Geojit and India Bulls have more than doubled.

Even in the banking space, Yes Bank and Kotak Mahindra have tripled, while ICICI Bank and Axis Bank have gained over 150%.

Does this raise valuation concerns? Thakkar of Angel argues that it’s not fair to look at base prices. “Even after the rally, many banks are quoting less than their book value. There is lot of potential in the space going ahead. We would prefer private banks as they would be in a better position to raise capital quickly and take advantage when growth comes.”

Desai and Rathi of Morgan Stanley said, “The Bull Case assumes global calm and recovery in global growth, strong policy action, benign deceleration in earnings as the corporate sector delivers its operations at a hectic pace, and a less severe NPL cycle in the banking industry than we currently anticipate, which allows liquidity to improve steadily in 2009.”