What's your take on global markets at this point? With mounting US and UK debt, some doomsday predictions have been surfacing of late. Do you see a large global correction in the offing?
We have to be prepared for periods of volatility globally and the fact that the returns we will get going forward will be far more modest compared to the growth that we have had since the aftermath of the 2008 financial crisis, especially in the last 10 years. I do not see any significant impact of an increase in US interest rates on emerging markets such as India in the medium to long term. In the US the more immediate fears are the prospects of a trade war with China and how that will play out in different regional economic blocs. As we can see, Asian markets are already spooked by trade war fears. More than US debt, what is worrying is the impact a trade war can cause on China's $1.2 trillion debt burden and how the country will be able to manage that. In India there are multiple local factors at play, including of course the general elections next year and the continuance in government policies. I expect the domestic markets to stay volatile and largely range bound, though there may be spikes in between. Corporate results are looking decent for the most part, though I do not expect any surprises there. There is a lot of uncertainty everywhere and this is having an effect on the allocations of capital globally.
Do you think domestic equity markets have become sufficiently decoupled from global markets - especially when you consider that our monthly Mutual Fund SIP book now exceeds 7,000 Crores per month? Or are we still in a "when U.S sneezes, India catches a cold" sort of scenario, so to speak?
There was an interesting analysis done by Bloomberg a few months back on the correlation between Indian equities and the global stock markets. It found that the correlation between Indian and global equities has been progressively reducing since 2010, when it was at its peak. Indian markets are reacting more to local events than what is happening overseas. Domestic investments are rising; there is more participation from domestic investors in the markets. With money flowing into mutual funds from retail investors, the mutual fund sector is a bigger participant in stocks and as we saw last year, investments by domestic investors surpassed that by foreign investors since 2007. Having said that, in this interconnected world it is impossible and also not desirable to be totally divorced from the global markets. After all we do have good trade relations with the US, there are a large number of US companies that have invested here, and there are funds with significant holdings in the Indian corporate sector. It is inevitable that anything that happens in the US is bound to have an affect here, but probably the Indian economy and in the turn the markets are more resilient now and can withstand any blips.
Locally, debt market yields have been rising and equity markets have been range-bound - or in the case of mid and small caps, in a correction mode since 2018.What should an individual investor's strategy be in these frustrating times when nothing seems to be going anywhere?
Yes, as we saw the RBI raised its benchmark rates in June and it looks like we may be in for a period of tight monetary policy, since inflation is obviously a concern. The market is expecting a steepening in the yield curve because in the first quarter of the year there was a conscious decision by the government to borrow less from the debt market - but that means that there will be more issuances in the second half and this will result in an upward nudge in the yields. You can already see that short -term yields have risen in anticipation. However, we see this as a temporary phenomenon and interest rates will probably come down in the longer term. Debt funds are looking attractive now and investors can invest in it with an outlook of 2 to 3 years, so that when the interest rates go down they will be getting good gains.
If you look at the period between mid-2014 and the early 2018, there was a huge run up in the prices of some small and mid-cap stocks. So, this correction has been long overdue. If the companies that investors hold are good with sound fundamentals, this correction is the ideal time to stock up and increase their holdings. Good companies never go out of fashion, though they may face some temporary downs.
Are you happy with the degree of penetration of the CFP program in India so far? Anecdotal evidence would suggest that the qualification hasn't quite built up momentum as yet…
It is not a question of being happy or unhappy... It takes time for a concept to build and gain traction. We are talking about the concept of financial advice and financial planning and it is a fact that in India people - middle income folks- do not want to pay for getting financial advice. It is the last thing on their minds. And therein lies the irony because it is precisely this segment of the population that needs the advice. People who are already wealthy only want wealth management advice, though here I would like to add a caveat and mention that wealthy people also need advice on succession planning and they often do not avail of it. The CFP Program is a certification that is a certain benchmark for the financial planning profession. Once the concept of financial advice and financial planning gains acceptance, the CFP Program and other such certifications will also become popular. In this context, I would like to add that the Ramadorai Committee on Household Finance had also endorsed the feasibility of introducing a rating model for financial advisors and intermediaries that would make it easier for financial consumers to opt for the right advisor or intermediary. That would also help the financial planning profession.
In your opinion, is India ready for fiduciary, fee based financial advice? Or are embedded commissions still here to stay, at least in the near term? Data shows that there are fewer than 1,000 SEBI Registered Investment Advisers, and many are struggling to command fees…
Yes certainly. There is a certain segment of the population - urban, educated, and earning salaries, with sufficient awareness - who are not averse to taking financial advice and approaching the process of creating and managing wealth in a systematic way. They would like to avail of the expertise that financial advisors offer, because they do not have the time that they need for this. I would say that both fee-based advice and product commissions will co-exist side by side for some time to come. It is not an either/or scenario at this juncture and I don't see any reason why one should not exist without the other.
Having said that, fee-based financial advice will work if customers or financial consumers know that the advisor is providing a valuable service and is really helping him or her to utilise the available financial resources judiciously and optimally. The concept of fiduciary responsibility has to be taken seriously by the advisor community.
The regulators have to be proactive in this regard. For instance, simple financial products that do not require much explanation can be sold over the counter, so to say, while complex financial products will be mandatorily sold by specialists such as investment advisors. This kind of a situation will also safeguard financial consumers from being sold products that do not suit them.
Lastly, do you think we're going to see a shift from managed mutual funds to passive funds like ETF's over the next few years? After all, that's the trend in most developed markets as alpha generation opportunities dry up.
ETFs have not yet taken off in India. It is not surprising considering that the though expense ratio of index funds and passively managed funds are far lower than actively managed funds. The inefficiencies of the markets were being captured by discretionary fund managers but that continued to fade over time. There has to be greater awareness about the benefits of investing in ETFs especially smart beta and active ETFs and the market making process has to be more robust obviously. With the maturity of markets and large funds flowing in markets, ETFs would be far more efficient vehicles to create wealth in the long run, and I have no doubt that they will catch fancy of investors in India sooner rather than later.