Credit Suisse sees a rosy future ahead—lower inflation, rate cuts, higher growth and so on. But then, how can the brokerage not be highly bullish after a six-month run in the Sensex from 16,000 to 20,000?
Credit Suisse analysts have asked the following questions about India:
And have found themselves answering ‘yes’ to all of them.
According to Credit Suisse, the economy is yet to feel the full benefits of the rupee’s sizeable depreciation, while the drop in market interest rates (three-month money and commercial paper rates are down more than 100 basis points over the last 12 months), the prospect of further policy rate cuts and the likely confidence-boosting effects of the government’s reforms, should also boost economic and market activity. Its GDP growth estimates are 5.7% in 2012-13, 6.9% in 2013-14 and 7.5% in 2014-15.
There is a persistence of relatively high fuel and food price rises. However, Credit Suisse analysts point out that core inflation will drop below 4% by mid-2013, with the headline rate of inflation slipping to less than 6%. This in turn helps to explain the headline wholesale price inflation forecasts of 7.3% and 6% for 2012-13 and 2013-14 respectively.
Credit Suisse analysts are looking for a total of 125 bps of repo rate cuts this year, with 50 bps at the 29th January meeting, further 50 bps in April 2013 and a final 25 bps in July 2013.
On policy matters, the key questions raised by Credit Suisse are: First, can the finance minister convince the market that his much-promised goal of limiting the central government budget deficit to 5.3% of GDP in 2012-13 is achievable (most are expecting an outturn in the order of 6%)? Second, can he set out a programme of measures to credibly achieve reductions in the deficit GDP/ratio in the coming fiscal year and over the medium term?
The government clearly faces an uphill task but the minister’s record suggests “we shouldn’t dismiss the possibility out of hand” as many have done.
Finally, Credit Suisse analysts, bring up the question: Will we see rating agencies downgrade India to sub-investment grade this year? The chances of two of the three main rating agencies moving India to junk status by end-2013 is small—in the order of 15-20%, perhaps. Fitch appears to be close to pulling the trigger but will presumably wait until the budget announcement before deciding whether to do so.
Much to our amazement, foreigners have poured in over $24 billion in 2012 to create a sharp rally in India. Since as much as $1.8 billion were pulled out of India-focused funds and ETFs, a Morningstar report gives an interesting take as to where the money came from in 2012 to create the sharp rally
Braving macro-economic negatives and policy paralysis last year, Foreign Institutional Investors (FIIs) poured over $24 billion into India in 2012. Indeed, India got its second largest inflow of funds in 2012. But since data about foreign investment is opaque and India is agnostic about sources of money, nobody knows which kind of funds have invested in India more. Where did the money come from? From hedge funds? From ETFs? From “India-focussed” funds (i.e. foreign banks and asset management companies set up funds with sole focus on investing in India for their investors)? Apparently none of these, if Morningstar, a fund rating company, is to be believed.
To make the Indian rally and the torrent of inflow even more mysterious, Morningstar, now shows that India-focused offshore funds and Exchange Traded Funds (ETFs) had registered a cumulative net outflow of $1.8 billion during 2012. A lot of sceptics believe that the money is being round-tripped into India. India money, (mostly ill-gotten), taken out of India, is coming back.
Since this cannot be proved or denied, here is the rationalization. According to Morningstar, the global economic situation last year prompted investors to switch from developed markets and look elsewhere. Two key events last year—the “Fiscal Cliff” and the possible break-up of the Euro Zone—prompted investors to look elsewhere. India was one of them, but money came here in a very different way—from “emerging market funds”. The quantitative easing in America and the sovereign bailouts in Europe prompted money to fly out of their domiciles and come into emerging and frontier markets funds as an alternative, as returns were better in India and similar markets. According to Dhruva Raj Chatterji, a senior research analyst with Morningstar, “One big contributor of flows into India in 2012 have been emerging market stock funds. These funds have a decent allocation to India in their portfolios, and have registered huge inflows from investors during 2012.”
According to Morningstar Asset Flow data, US Diversified Emerging Markets Funds and ETFs together registered the second highest ever annual inflows of almost $49 billion during the year 2012, with the highest inflow being $56 billion recorded in 2010. Similarly, funds and ETFs belonging to the Morningstar Global Emerging Markets Equity category in Europe registered a net inflow of €11.66 billion up to November 2012. One of the most prominent index funds—Vanguard Emerging Markets Stock Index Fund—which is an index fund with assets in excess of $75 billion at the end of 2012, saw its India allocation go up from 5.5% at the end of 2011 to 7.2% at the end of September 2012. Other prominent funds which featured India in their allocation were iShares MSCI Emerging Markets Index Fund, Oppenheimer Developing Markets Fund, Vontobel Emerging Markets Equities, and Aberdeen Global Emerging Markets Equity. “With a partial allocation to India in several of these fund’s portfolios, the country has been an indirect beneficiary of inflows into these funds,” said Chatterji in his Morningstar report.
With the perfect benefit of hindsight, Morningstar data suggests that FIIs preferred to diversify through emerging market funds rather than focus directly on India which was hampered by corruption, delayed policy making, coalition politics and mud-slinging apart from inflation.
SEBI has finally come up with its Investment Advisor Regulations, but what will these regulations achieve with a long list of entities and products that are outside the scope of regulations?
The Securities and Exchange Board of India (SEBI) has finally announced its regulations to oversee financial advisors. From now on, anyone who wants to provide investment advice will have to register with SEBI and follow the rules contained in the new regulations. The regulations will not apply to the long list of products and entities:
a) Any person who gives general comments where such comments do not specify any particular securities or investment product;
(b) Any IRDA-registered insurance agent or broker
(c) Any pension advisor registered with PFRDA
(d) Registered distributors of mutual funds
(e) Any advocate, solicitor or law firm, who provides investment advice to their clients, incidental to their legal practise;
(f) Any member of Institute of Chartered Accountants of India, Institute of Company Secretaries of India, Institute of Cost and Works Accountants of India, Actuarial Society of India or any such body
(g) Any stock broker or sub-broker registered under SEBI, portfolio manager registered under SEBI or merchant banker registered under SEBI
(h) Any fund manager, by whatever name called of a mutual fund, alternative investment fund or any other intermediary or entity registered with the Board;
(i) Any person who provides investment advice exclusively to clients based outside India:
(k) Any other person as may be specified by the Board.
Interestingly the draft guidelines had proposed to exempt “investment advice given without any consideration through newspaper, magazines, any electronic medium, or broadcasting medium, which is widely available to the public”. Effectively the media was exempt from the proposed guidelines, but strangely this is absent in the final regulation. Does this mean that the media will have to stop writing about which funds or which stocks to buy? Or will it have to register with SEBI as an investment advisor? Has the media been dropped from the exempt list intentionally or is it another example of SEBI’s sloppiness?
Banks, finance companies other institutions that wish to enter into the advisory business need to create a separate department which would handle advisory and not be an agent. The idea is to prevent mis-selling and make banks and distributors accountable for their advice. How far is this workable? It is the small distributors who would be worst hit since the banks would always find a way around it. In fact, if SEBI is really serious about curbing mis-selling, it should have had a speedier grievance redressal system with stiff penalties. SEBI has been quite lenient in dealing with offenders as Moneylife (alone) has repeatedly pointed out.
Earlier, SEBI had issued a circular under which an agent will be able to sell for a commission (subject to a disclaimer that he has not done any due diligence) and won’t be able to advice. Considering the actual situation on the ground, a financial advisor asked, “How is an agent supposed to promote his product? Would he depend on the recommendation of the advisor?” Moneylife spoke to a smart and ethical distributor of financial products, who said, “I will not be a surprised if (these) so-called investment ‘advisors’ work closely with ‘agents’ wherein the agents would give a pass-back of the commissions they earn to advisors who recommend customers to them. This currently happens as well but it is more open as there is no restriction, where financial planners have tied up with agents of certain companies. Though the commissions are not disclosed, they earn enough for passing on a lead to an agent.” Expect this to increase, SEBI’s noble intentions notwithstanding.
SEBI has also enshrined in the regulations that investors have to be profiled for risk including age, investment details, income details, risk tolerance, liability and others. Will risk profiling ensure that the lead will not be passed on to those agents who would share their commissions with the advisor friends?
Moneylife had analysed the proposed regulations and had suggested these regulations will be of little consequence and that they will mean little to investors and mis-selling may continue as before and with appropriate disclosures!
Under the new regulations, “any graduate” with an experience of five years is eligible to become an investment advisor. Does that by any chance reduce chances of mis-selling knowing the fact that investors are as financially illiterate as have always been?
Another guideline talks about the arm’s length relationship that the advisor is ‘advised’ to maintain with his all other activities. How does SEBI ensure that would happen, and that the investor would stay protected? The disclosure norms laid down do not have any meaning if the investor does not understand what they means and how it could be harmful for him.
Chapter III of the guidelines deals with the “general obligations and responsibilities”, a vague string of guidelines that little to do with actually improving the way financial products are sold in our country. The investment advisor is required to disclose all “conflicts of interests” that would arise. Are advisors being expected to become ethically responsible to do that on their own? Without any framework on how that would be ensured, it remains vague and free to one’s will.
When the advisor is asked not to divulge client information, how does the client even find that out? What is the closed loop mechanism in practice here that ensures it would not happen?
Another guideline requires the “investment advisor not to enter into transactions on its own account which is contrary to its advice given to clients for a period of 15 days from the day of such advice”. Can he do this after 15 days? And what happens if he does that under those extraordinary circumstances that he has been allowed to do that even within 15 days? The buck, in that case, is clearly passed on to the investor, through mandatory information provided to him 24 hours before taking that action.
In any case, these moves would not be able to either curb mis-selling, or help investors about their grievances, since there are no changes on that front and the guideline remains “as applicable”. Second, the only mainline investment product that comes under SEBI is mutual funds. Issues related to other financial products will be dealt with the respective regulators. As such, there would be no single body regulating investment advisors. Is there mis-selling of mutual funds? Well, there has to be selling first! Mutual funds are struggling to add assets since SEBI’s August 2009 decision has ensured that interest in mutual funds has totally waned.