'Long-term capital gains tax relief will be a game-changer for the markets'

Retail investors in India are by default optimistic. They are strong believers in the long-term story of India, and rightly so, says Sandeep Bhardwaj of IIFL Securities.

The second half of 2022 will be the time for investors to seriously churn their portfolio, SANDEEP BHARDWAJ, chief executive officer for retail at IIFL Securities tells Puneet Wadhwa in an interview. Edited excerpts:

Will the second half of the calendar year 2022 be as painful as the first for the markets?

We remain cautiously optimistic about the capital markets in the second half of 2022. Capital markets are about asset allocation, so there will be cycles. Currently, the equity markets are up against headwinds like central bank hawkishness, commodity inflation, likely global slowdown and supply chain constraints, etc. Higher rates always create challenges in the short-run.

However, over the medium term, it will be good that the focus on liquidity flows is reduced and more companies will see value rediscovery. Some of the pain points will last, but the second half of 2022 could see the base being set for a healthier market. The second half of 2022 will be the time for investors to seriously churn their portfolio.

How have you navigated the first half of CY22 as a brokerage? Are there any tactical shifts in your strategy for the remaining half?

At IIFL Securities, we have had a spread of clients in the broking business including pure retail, HNIs, aggressive traders, corporates, institutions, etc. Not all of them go through similar cycles, and our business model stands de-risked to that extent.

Is some sense of caution now creeping into retail investor's mindset on how they approach equities as an asset class?

Retail investors in India are by default optimistic. They are strong believers in the long-term story of India, and rightly so. History is the best proof that investors who held on to good stocks, in the long run, have always made profits; and retail investors do understand this.

WATCH Q1FY23 Earnings Preview: Banks to outshine, metals may disappoint

What more policy response do you and foreign investors expect from the government?

For now, the big challenge is to handle rampant inflation and that will resolve most of the other problems. But to enthuse global investors and calm markets, there are two measures that can help.

Firstly, the government can look to provide relief on the long-term capital gains tax front, which can be a game-changer for the markets, just like the reduction in corporate tax rates in September 2019 turned out to be a game-changer. Secondly, a deep focus on fiscal deficit control will enthuse foreign portfolio investors (FPIs) and could set the tone for a revival of FPI flows. That can be a huge policy difference.

Do you think life will get tougher for you as an investment manager in the backdrop of an overall risk-off sentiment?

Challenging markets offer the best time for innovation. The current market conditions will separate the men from the boys in the investment advisory business. In the last few years, the advisory business has almost become one with no entry barriers. In the last three decades, IIFL has built a brand of being sensitive to client needs, staying receptive to changes in technology, and setting the tone for the markets. Our simple mantra was always to build the business around the customer.

Do you expect margins across the verticals IIFL Securities operates in to come under pressure as investment avenues shrink, investors become risk averse and costs rise?

Firstly, I expect more investment avenues to become available. The last few years were all about equity. With rising yields, debt and debt funds will be back in the reckoning. Risk aversion, I maintain, is never a trait of retail investors who are open-minded if you have a good story. Yes, manpower and operating costs have gone up, but the use of technology, digital trading, and app-based trading has come to our rescue. Our operating margins do go through cycles, but have generally been stable and remained above average. For us, the digital transformation of this business is our most significant cost and operational advantage.

How difficult has new customer acquisition and retention become now in the sphere your business operates?

While customer acquisition can happen via technology, customer retention only happens through trust. That has not changed and is unlikely to change in the future. We are focusing on individuals who are tech-savvy and are also aware of the risks in investing. That is the big market to tap. For customer retention, we keep a tab on whether the customer actually performed well. No customer expects you to assure a 100 per cent success ratio. What they look for is hand-holding in confusing markets, alternate strategies when they are stuck in positions, etc. That is what we unerringly deliver.