Are asset managers a safer bet than brokers in India's capital market?

Mumbai: Investors looking to bet on India's thriving capital markets would be better off buying shares of asset managers rather than exchanges and brokers, said money managers. While exchanges and brokerages are likely to feel the heat of the various regulatory actions aimed at curbing excess speculation in futures and options, mutual funds and allied businesses may continue to benefit from flows into their products, making them a safer bet at this juncture.

"While the downgrade cycle in capital market stocks has bottomed out, there could be degrowth in broking stocks given the slowdown, but AMCs could perform better," said Mahesh Patil, CIO, Aditya Birla Sun Life AMC. The Nifty Capital Market index has been the best performer among all NSE indices in the last three months. After slumping 20% from its peak in October, it has rebounded in the past three months. Since mid-April, the index has surged 31.4%, while the benchmark Nifty gained 7.6% in the same period.

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Nippon Life India AMC jumped nearly 50% in this period. CDSL and Anand Rathi Wealth gained 40% and 45% respectively. While the index remains 6% below the peak, money managers said valuations of most of these entities, especially brokers, may be rich, making them vulnerable to a sell-off.

"The current valuations appear expensive for broking companies, given their cyclical nature and high correlation with market movements, and we remain cautious on them," said Vikas Gupta, CEO, OmniScience Capital. "What we have done, and suggest for investors, is to take selective exposure to banking stocks that own AMC subsidiaries, as they offer more attractive valuations and meaningful upside potential from current levels."

The rich valuations are encouraging companies to sell shares in the primary market, with NSDL and ICICI Prudential AMC looking to launch their initial public offerings over the next few months.

“When large IPOs from a sector are expected to list in the market, buying interest emerges for other listed players as well, but investors should keep tabs on the valuations as well,” said Chirag Mehta, chief investment officer, Quantum AMC.

Profitability of exchanges has taken a hit of late after the Securities and Exchange Board of India’s actions to temper retail investor activity impacted activity. In the case of broking firms, the regulator’s steps to tighten regulations also squeezed their profits.

“When the markets corrected last year, capital market stocks witnessed a sharp fall from the peak due to reduced activity, followed by a regulatory clampdown on F&O volumes and margin requirements,” said Mahesh Patil, CIO, Aditya Birla Sun Life AMC.

The bearish sentiment has stablised since, and capital market stocks have been inching higher in line with broad market performance, said Patil. Analysts said technical indicators are not showing a reversal yet despite the rebound.

“We may see some consolidation in these names, as they have massively run up in the last three months,” said Ruchit Jain, vice-president, head, technical research, Motilal Oswal Financial Services. Traders and investors can use a ‘buy on dips’ approach in the near term, especially for CDSL and MCX, which could run up as these stocks have seen strong trading volumes despite some decline, said Jain.

“While capital market stocks offer higher relative growth, valuations are elevated after recent run-up and private banks and insurance stocks are a better bet as they offer comfort in valuations and decent growth prospects,” Mehta said.