Need To Sacrifice Growth For A Better Future

Our country needs a lot of structural changes. Structural changes do not happen overnight and will take some time. But we do not have liberty of time. So in turn, what we are focusing on is the tactical aspects. By tactical, I mean cost cutting, cutting of non-planned expenditure, more tax revenues and curbing gold imports.

Anup Maheshwari
Executive Vice President
DSP BlackRock Investment Managers

What should be important for investors today – growth or safety of capital? 

In today’s scenario, investors have multiple options as far as asset classes are concerned. But you need to be closely looking at what these asset classes are offering. If you are looking for safety of capital, you need to be invested in fixed income, and if you are looking for growth accompanied by volatility, you need to be in equities. But this depends upon and varies among investors. When an investor is investing in equities, the main rationale behind this is growth and not capital protection. At the stock-specific levels, there are a lot of opportunities given the mix of market and valuations. So, investors should be looking for growth in equities.

From a promising economy which was growing at the second fastest pace in the world, we have come to see growth which has set us back somewhere into the early 2000s. What are the reasons for this?

One thing is clear that we are not in an investment cycle. Normally, everything falls into place when you have good capital inflows and high business confidence. This strong investment cycle tends to feeds into economic growth. This time around, the investment cycle is broken, business confidence is low, and the policy environment is not as clear as it should be. Our view is that growth would be lower in the current scenario. However, agriculture is acting as catalyst following a better monsoon. If we did not have a good monsoon, the growth would have been slower.

We are in a phase which is more about tightening one’s belt, addressing the fiscal deficit, CAD and cost cutting, which has a multiplier effect on growth. As we are tightening our belt, there is a need to sacrifice growth. Thus, having low growth is logical, and is actually a good sign. In turn, it is forming a base for better times in the future.

The current account deficit has been the biggest worry for the markets. Do you see the situation improving any time soon? If not, how much of time would it be before it gets back in shape and how can it be brought back into shape?

The government has already started to address this issue. But you have to look at things in two ways. One is tactical and the second is structural steps. What we think is that our country needs a lot of structural changes. Structural changes do not happen overnight and will take some time. But we do not have liberty of time. So in turn, what we are focusing on is the tactical aspects. By tactical, I mean cost cutting, cutting of non-planned expenditure, more tax revenues and curbing gold imports. These are all tactical steps and one has to bear in mind that these are temporary solutions that will only manage the problem. In the long term, we really require more structural changes. Handling the tactical side is the best we can do for now.

Coming to the fund management industry, at what stage are we in? Nascent, matured or probably somewhere in between? 

I think we are maturing as time passes. We are moving more towards an institutionally-driven market. I think retail investors are getting smaller in proportion. On the other hand, foreign investors have become dominant in this market. 

When looking at funds over the last 10 years, we used to be bench-mark agnostic. There was a bottom-up approach and beating the index was almost a given. Index investing was not popular in India. But in the last one year, that has turned to be a challenge, with most funds underperforming the indices. These things were already there, but it is now getting more and more benchmark-oriented.

On the corporate governance front, MFs have been asked by the regulator to be more active. If you look at the corporates that are listed, there are still considerable challenges. That is the biggest problem in our industry. The corporate balance sheet gets exposed in the downturn. And there is so much of mis-governance that the fund managers may understand only much later. If you look at the annual report, you tend to believe the numbers, but then these numbers change suddenly. So, if I have to sum it up, the industry is maturing for sure in terms of processes, construction, governance and risk management, among others. That is an ongoing process.

As you said, the retail proportion has declined. What steps are required to increase retail penetration in the MF industry? 

Measures like the Pension Bill will definitely help. That is the start we can look forward to, and I think the benefits of the same will be seen over the next decade. We need to encourage equity as a savings tool, which is what the Pension Bill does. You get a tax benefit on your basic salary, and that is long-term, not short- term in nature. Linking it to your salary is the best way to invest, as you will keep money aside for equity. It is like the first SIP, when you do not focus on value every day. Then you will start appreciating the value of equities. I think pension is the best way to encourage retail participation.

What is your advice to retail investors in the current situation? 

My advice would be to continue with your SIPs. Do not ever change that. It should be like keeping one’s money in the bank, where one does not question the value of the FD every day. The whole idea is to remove timing out of the system. We need to understand that the equity markets have to outperform fixed income in the long term, or companies would not exist.

Companies are in business to add more value over the debt cost that they pay. If they cannot cover their own debt obligation, they should shut down and park money in banks. 

So equities, by their very nature, have to outperform debt and create more value over fixed income. 

As shareholders, we need to appreciate that. The only problem is that equity markets go through cycles. However, cycles are an opportunity if you understand the true value of equity. If you don’t, it could be a major turn-off and you tend to lose faith in the asset. This is what is happening to many investors. 

But not believing in equity is like saying you don’t believe in any corporate in the country. This is not the right approach. So, the simplest way is to stick to your SIP and not tinker with it. In case the markets become irrational and come down, invest more into equities if you have the appetite.