Indian stock market may not fall as much as others: Zerodha CEO Nithin Kamath

Nithin Kamath, the chief executive of India's largest discount brokerage Zerodha, expects the Indian stock market to outperform due to negligible leverage.

"By outperforming, I don't mean our markets will go up, but we will probably not fall as much as others. And if we don't fall as much, we will probably outperform on the upside. This is because of negligible leverage in our markets and all the folks waiting to invest in India," the founder of Zerodha says in a Twitter thread.

In bearish times, when buying interest is low, forced liquidation of leveraged positions creates havoc, Kamath explains. "The down moves are exaggerated, as we have seen in highly leveraged markets like the US or even crypto in the last 12 months. Btw, this also creates spikes on the way up," he says.

After all, the regulatory changes in the last two years by capital markets regulator SEBI (Securities and Exchange Board of India) that reduced leverage, there hasn't been an instance when Zerodha's risk team had to square off the positions of a large group of customers due to MTM (mark-to-market) losses, says Kamath, adding that the risk team has been complaining about much lesser work.

Also, the most active leveraged trading activity in India has moved to indices which are much less volatile than stocks and hence lesser need to force close positions, the Zerodha founder explains. "No forced squareoff = lower volatility = lower exaggerated moves on the downside when markets turn bearish," he tweets.

Kamath says there's significant interest in Indian markets. "Almost every time markets gap down, we've seen more investors logging in; historically, it was the opposite. I guess this means huge buying interest. Even on the institutional side, local & foreign, private & public, there's a lot of interest in India compared to others," he adds.

The Zerodha CEO, however, cautions that in an interconnected world, if the US bear market continues, there is no way India will be able to escape. "We will eventually most likely follow the trend. But I guess we will continue to outperform on the downside and be less volatile," Kamath says.

"My neutral to slightly bearish view on the broking industry is because of what has been happening in the US over the last year. To do well, we need a bull; bear/neutral isn't enough. Also, dunno how many Indians who can invest aren't already doing it," Kamath says.

"I think the trade for the last year or so, which continues for the above reasons, has been Long India, Short US & other emerging markets. But since I am publicly posting it, maybe this will come back to bite me," he adds.

Kamath had last month tweeted that buying real estate where prices haven't already appreciated - in tier 2 & 3 cities or on the outskirts of a metro - is like buying a small-cap stock hoping it becomes large-cap. While all this can mean a good return on investment (ROI), it is a high-risk strategy and hence capital allocation should be lower, Kamath said, adding that real estate is unlikely to beat inflation and interest costs in the long run.