Broking biz will flourish for those who constantly upgrade: Emkay Global MD

"Maximum returns are seen when small-caps of yesteryear become mid-caps of today and large-caps of tomorrow", says Krishna Kumar Karwa

As front-line indices move slowly towards reclaiming their all-time high levels, Krishna Kumar Karwa, managing director, Emkay Global Financial Services, in conversation with Puneet Wadhwa says the markets have played by the book in 2022-23 (FY23), with rich valuations correcting in response to foreign portfolio investor (FPI) outflows and, subsequently, attractive valuations resulting in FPI flows turning around. Edited excerpts:

What is your assessment on how the markets have played out thus far? Do you expect such volatility to continue in the rest of FY23?

In the past few months, we have seen FPIs investing around $8.1 billion as valuations became attractive and fears of another round of a sharp rupee depreciation receded. Markets have played by the book in FY23, with rich valuations correcting in response to FPI outflows and, subsequently, attractive valuations resulting in FPI flows turning around.

Domestic investors have been resolute in their faith in Indian equities and have regularly invested directly or via institutions.

Domestic markets will continue to be driven by valuations and flows. Global flows will be erratic, as rates in the US harden and quantitative tightening impacts liquidity.

High energy prices in the Eurozone, pandemic-led disruptions, and the domestic real estate bubble in China will sway global growth.

Notwithstanding India’s leading gross domestic product (GDP) growth of over 7 per cent, the country will see its capital markets being hit to some extent. That said, India, with its realistic fiscal and monetary policies, is possibly on the cusp of a massive and globe-leading GDP growth for many years to come.

Would you term India as a ‘sell on a rally’ or ‘buy the dips’ market?

Realistically, investors who buy and sell companies (i.e., businesses) based on short-term markets will end up exiting excellent businesses at the wrong time and at wrong valuations.

The domestic economy is poised for better growth than China, the US, and similar peers, for many years ahead. In such a scenario, every sell-off for long-term investors is a buying opportunity in quality companies/businesses at reasonable valuations.

Where do you suggest investors look for opportunities in the next few months?

Investors should look to buy at reasonable valuations, into business leaders that offer considerably good long-term growth prospects. Depending on the size of the addressable market, such companies may fall into the small-, mid- or large-cap space. Notably, maximum returns are seen when small-caps of yesteryear become mid-caps of today and large-caps of tomorrow.

 

Has the recent market volatility dented the confidence of retail investors in equities as an asset class?
 

The equity cult in India has largely improved in the past few years, although penetration is abysmal and still has a long way to go, as evidenced in the low share of equity holding in household savings.

Domestic investors have, over the years, learnt to live with market volatility, which is driven oftentimes by global factors far removed from domestic realities.

Over the longer term, equity returns outperform fixed income, and investors have started allocating some savings to equity. Whenever there are sharp market corrections, domestic retail too − like any prudent investor − takes a step back to analyse before investing again.

Retail investor faith in Indian equities remains robust as ever. Lump-sum buying and selling – direct or through mutual funds - is a function of opportunistic timing of the market.

How are broking and wealth management businesses coming along?

Discount broking, full-service retail broking, and institutional broking have an important role to play in the ecosystem. Each feeds off and complements the other. Retail participation is more skewed towards derivatives, as gains and losses are magnified owing to the leverage they entail. It is natural for volumes to hit new records when markets are rising and stay subdued when there are sharp corrections or listlessness in the markets. The broking business will continue to flourish for those who keep upgrading their offering.

Wealth management is poised for exponential growth in the years to come as economic prosperity reaches more and more people. Again, service offerings need to be tailored in line with targeted client profiles.

Of late, margins have been under pressure as a number of new players have forayed into the wealth management business, where the opportunity is huge and rising volumes will compensate for falling margins.

Where do you see the investment advisory business headed?

The investment advisory business is set to grow manifold - even small investors are keen to explore direct investing, which needs specialist investment advisors to hand-hold.

Medium and large family offices understand the value of specialist advisors, who they have been regularly engaging.

The best way to stand out is to be able to correctly assess client requirements, as well as our own capability, to deliver on such a requirement − in case of a mismatch, learn to say ‘no’.