What is needed to ride out the capital markets storm

The week gone by was notable for two developments regarding the MF sector. One was the report by Crisil-S&P Dow Jones Indices on the performance of the MF sector in the past five years. The other was the observation on SEBI's steps to revive the MF industry by Quantum MF.

The Crisil-S&P DJI report brought to light that a majority of the actively managed equity mutual funds had underperformed their respective benchmark indices over the past five years ended June 2012.

The Quantum MF report, referring to the changes being proposed by SEBI, felt the steps would breathe some life into the industry that has not been able to mobilise savings from investors.

The issue is whether the investors are willing to put their hard earned money into the capital markets. The market witnessed a surge with the Sensex rising 337 points on Friday because of the Draghi effect after the ECB chief outlined readiness to buy unlimited quantity of bonds. But the crucial issue is what the German Federal Constitutional Court would pronounce on September 12 on the European Stability Mechanism or the permanent bailout fund and the fiscal pact for the euro. If the verdict goes against the German Government, there could be chaos on both the economic and political fronts that would spill beyond Germany’s borders.

The court would rule on an appeal that by endorsing the €500 billion ($610 billion) ESM and the fiscal pact (to enforce debt reductions), Germany will let go much of its sovereignty and power to decide what to do with taxpayers' money.

It is events such as these which are making capital market investors not to bet on the long term but live for every day.

In an interview to Business Line , S. Karthikeyan, Professor-Finance, Jansons School of Business, Coimbatore, said the reluctance to invest was not uniform across all investor segments. The experienced, who “stayed calm and stayed invested” across many market crisis in the recent past, have learnt from their experience. The inexperienced are investing since they have no fear. Only those with a little experience are fearful. But as the Indian economy has been on a growth path only for a decade or so their number is far higher.

On the steps that the Government should take to revive the economy, he said: “At this juncture, FDI in retail/insurance may be the last thing the investors need”. The Government should take steps to activate the economy such as diesel price hike, faster clearances of investment projects in power/coal sector. A falling GDP and increasing fiscal deficit was not a perfect recipe for drawing investments from both within and outside the country.

Asked whether the revival of the markets could precede that of the revival of the economy, Karthikeyan said “investment theories say like that” and it had happened in the past. If the fall was because of economic cycle, a reasonable prediction on recovery could be made. But the present scenario “is government made”. Inaction will lead to a wait till 2014. Election and a possibility of mandate are likely to bring scope for revival. It is the forward looking people (legendary investors) who will predict the revival of the economy.

On the dismal performance of a large number of even blue-chip MF schemes over a 1-5 year period with many falling even behind their benchmarks, Karthikeyan, who is also a Director in Coimbatore Capital Ltd, said this reflected the inexperience of the fund managers who failed to understand that “missing an opportunity is less insignificant than that of investing in a loser”. What holds good for investor was also “good for fund manager and fund houses” and they should realise they could not create non existent investment opportunities.

Responding to a question on what taxation measures the Government could take to revive the capital markets, he felt this would work when the real business was active. But the problem now was performance. The Government must promote investment culture and target non-investors. What was needed was cultivating the investment habit in the minds of the savers and the regulator, exchanges and the government must concentrate on training in `investment process than procedure’.

Karthikeyan, quizzed on what was preferable — a liquidity driven rally or that driven by fundamental strength of the economy, said “fundamentals-driven rally is preferred”.

Liquidity driven rally could not be avoided but much of the liquidity driven rally “may not sustain” and it was a “risky bet”. While some make money in that, investors must recognise that it “happened because of luck and boldness, not skill”.

There is “no reasonable alternative to the sound investment decisions in the long run”, he concluded.