The European debt crisis and the downgrade of the US credit rating by Standard and Poor (S&P) coupled with growing fears about the slowdown in the world economy and recession in some of the developed countries led the world stock markets as well as India's stock market to crash, the worst since September 2008.
The Indian brokerage industry has been facing a tough time. Indian stock markets have been relying on inflows from foreign institutional investors (FII) for generating volumes. The inflows in 2011 have been the lowest since 2002 leading to decline in brokerage. The downturn is because of declining volume, low earnings and even lesser return. Indian stock markets have been the worst performers among all emerging markets in the current year. The Indian investors are also not putting their money in equity markets due to lack of return. Most of the brokerages are either eliminating staff or shutting shop altogether. 48 broking firms have surrendered either their NSE or BSE membership over the last year.
The sharp correction witnessed in the market has suggested several attractive valuations. There are lots of bargain opportunities available for investors in many of the midcaps and largecaps stocks which are trading at distressed valuations. Looking to cash in on this opportunity, buying from retail investors and high networth individuals surged to a 15 month high. Data from Bombay Stock Exchange (BSE) showed that net shares bought in August so far were highest since May 2010. This augments well for the brokerage industry as more volumes will lead to more brokerage and this will help the industry to come out of the slump.
However buying from foreign and institutional investors segment which generate maximum brokerage has not picked up. Once institutional inflows start pouring into India then only will the brokerage industry be able to recover. But at least the current downturn has brought investor participation back into the markets. So the current crash might just be the blessing in disguise which the Indian brokerage industry desperately needs to get back on its feet.