'Liquidity is a follower, not a driver'

Last Updated: Mon, Apr 21, 2008 03:45 hrs

"If there is no passion, then the stress is high," says Alroy Lobo on the job of an analyst. As the chief strategist and global head - equities at Kotak Asset Management, it is his passion for the job that has helped Lobo keep a level head through the different market cycles.

The origin of this passion, though, lies outside the stock market. As a Godrej & Boyce product executive, the first job he took after his management studies, a young Lobo was required to analyse on the vendors from whom Godrej made its purchases.

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In the process, he had studied in detail and reported on a whopping 1,600 companies in a span of four and a half years. "Somewhere, I started liking it and decided to take it up full time," he says. The liking seems to have only grown over the years, Khyati Dharamsi and N. Sundaresha Subramanian realised during a 90-minute talkathon with him. Excerpts:

Will direct market access (DMA) change the way global investors operate?

As of now, nothing can go without the broker's intervention as the regulator holds the broker responsible for everything. In DMA, the order goes directly into the system and gets directly implemented and the broker is not involved, though the order passes through his DMA platform. DMA even globally would be in the region of 15-20% of the overall market.

Once it opens up, the execution commissions get concentrated with a few brokers. So, whoever is able to initially grab it, gets the higher market share. They are only execution related businesses and not full service broking charges. That means, research is not the criteria, but cheapest broking rates. That is why, DMA is limited to 15%, as a lot of people want full research.

Very few funds have big research teams. DMA is a platform available globally and if a global broker wants to start DMA operations in India, then the technology is already available for him. Local brokers are gearing themselves up to build that platform.

How does research in India differ from that done globally?

In a number of Indian firms (brokerage houses), the experience level of research analysts is reducing. Experienced people are either joining asset management or opening their own firms. In India, a research analyst with 12-13 years of experience is a luxury. Globally, there are a lot of middle-aged analysts in the developed countries, some of whom have been in the industry and then turned to research.

There are doctors covering pharma as analysts. There are managing directors of $1-10 billion firms, who have joined as analysts. It takes at least three years for an analyst to have a grip on the sector. New analysts are under far more pressure to deliver research quickly, while the older analysts have had their time to look at the sector and then make calls. In India, we are yet to see a phase where after spending 10-15 years in the industry people say, "Now let me spend some years in research."

What is your take on the short-selling regulation? How different is the regulation abroad?

There are limitations in making it work. Firstly, only F&O stocks are permitted. If you want more capacity, then the facility needs to be extended to most stocks, which are not in F&O. Shorting through the F&O market is a far more cost-efficient way of shorting rather than the stock lending and borrowing mechanism.

There is a guideline saying that after you have borrowed a stock you have to give it back on a T+8 basis. So, to cover it, the borrower will have to do at T+6. The borrower only has a 5-day view and will have to assume that he will have another person to borrow from so that he can roll it over. In futures, one can take longer calls. There are two constraints – cost of operations and the list being not extended beyond F&O stocks.

Hence, people will still short using the F&O market. Overseas, there are no stock futures and so the stock lending and borrowing mechanism is the only way they can short on stocks. They also have longer timeframes.

What does the global scenario indicate?

On the subprime issue, 40-50% of the total provisions have been made, which means more have to be provided for. There are cases like Bear Stearns, which will have to be bailed out. If the central bank starts pumping money into such firms, the amount of state control increases. If they are opened out to bailouts from the East, there are political overturns. So, the third method would be consolidation such as JP Morgan taking over Bear Stearns.

Now, when negative news comes in, the impact on the market will not be that significant, unless the particular entity is heavily leveraged. The extent of leverage that fuelled market cap would shrink. The valuations seen during the boom times may not repeat.

What about India as an investment destination?

Our real economy has a lot of insulation against what is happening globally. We have enough liquidity buffers in the system to manage a situation when there is not a single dollar coming into the country. If the Indian markets have to bottom out, they have to do so this quarter. A number of countries have recoupled instead of being decoupled as the exports have increased. Markets are far more globalised now.

Things get priced in very quickly. So, bad news gets priced in quickly and bear cycles should therefore be shorter. Unless you see a vibrant domestic market, you cannot decouple. If global investors start hammering the stocks, it is already time to buy.

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For every $3-4 billion that global investors take out of a country, they lose $50-60 billion of market cap or about 30% on the marked-to-market basis and so it doesn't make sense for them. Liquidity is a follower rather than a driver.

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