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How stocks of brokerages, fund houses, insurers will be impacted by market volatility

Positive sentiments, even during high volatility, can be good news for market players.

, ET Bureau|
Sep 30, 2019, 06.30 AM IST
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Stock markets usually remain volatile for a few days after big moves and it has been no different this time.
The Sensex rally on 20 and 23 September heralded the return of volatility in the Indian market. The 8.3% jump in two days was triggered by the government’s move to cut corporate tax. Though the move will not help revive the economy in the short-term, it may boost capital expenditure from the private sector. “The impact of tax reduction in private sector capex will be visible in the next 12-24 months,” says Mihir Vora, Director and CIO, Max Life Insurance.

Like continued government spending, private capex revival is necessary for sustaining economic growth. The move to charge only 15% corporate tax on new companies incorporated for manufacturing should increase FDI inflow into manufacturing. Job creation and the resultant consumption should improve economic growth in coming years.

Markets usually remain volatile for a few days after big moves and it has been no different this time. After remaining stable on 24 September, Sensex slid by 500 points the next day. While fundamentals of most listed companies will not be impacted by this volatility, it will impact a set of players whose businesses are directly linked to the market. Let us take a closer look at these.

Increased market activity triggered by high volatility is good news for brokerages because it increases revenue. However, the reverse can happen if extreme volatility scares away investors. “A few days of volatility is fine, but too much is not good. What investors need is a sustained positive environment,” says Vora.

Investment bankers will also benefit because a strong secondary market will trigger a series of IPOs of new companies or follow on public offerings (FPOs) by existing companies. It is worth noting the segment where increased investor activity is happening. What happened on 20 and 23 September was not a broad-based rally, but one triggered by short covering. That is why it was restricted to a few large-cap companies. “Brokerages will benefit more when investors return to the market and that is not possible without a rally in midand small-caps,” says Kishor P. Ostwal, CMD, CNI Research.

Prices of some brokerages have already reacted positively and therefore, are not worth getting into. However, market players like Edelweiss, JM, etc are still trading at attractive valuations. This is because they are involved in other financial activities around which there are concerns that are keeping prices under pressure.

A strong market is good news for brokerages, insurers
brokerages, insurers

Some market players are available at attractive valuations

For example, prices of Edelweiss fell by 47% over the past year due to concerns about its developer finance exposure. However, the government’s decision to allow NBFCs access to PSU banks—banks will reach out to customers using the NBFC network—will be of great help. Edelweiss has entered a co-loan generation agreement with SBI and Central Bank. Edelweiss will lend around 20% of the approved loan amount while the relevant bank will colend the balance 80%. “The co-generation agreement is a positive move for Edelweiss since it has been struggling with liquidity,” says a Emkay research report.

Analysts are positive about JM Financial as well. Though JM Financial is also into distressed credit and mortgage lending in addition to its core working area of investment banking and wealth management, it enjoys good liquidity. With several banks and NBFCs still auctioning NPA portfolios, it offers a good business opportunity for niche players like JM Financial.

AMCs & insurance companies
A strong market helps AMCs with better assets under management (AUM). This increase in AUM can happen in the form of increase in existing corpus (due to price appreciation) or fresh inflows. Large AUM is good for AMCs because their revenue— asset management fee—is charged as a percentage of AUM. Since Ulips constitute a major part of their asset base, life insurance companies will also benefit from strong positive market sentiments. “Ulips also see good collection when the market is doing well,” says Vora.

Among life insurers, analysts are bullish on SBI Life because of its wide reach. The ongoing shift from physical assets will also help strong players like SBI Life. More importantly, SBI Life has reported strong numbers in 2018-19 and the trend has continued in the first quarter of 2019-20.
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