Crisis could be cathartic

Crisis could be cathartic

In 2009, investors will use past performance as a benchmark while investing in funds. The industry must ensure that they are armed with the knowledge required to make informed decisions.

Vivek Kudva

It was a turbulent year for the global markets, with September witnessing significant changes in the financial landscape. The liquidity squeeze and uncertainty surrounding many large financial firms led to unprecedented measures, including government bailouts, forced mergers, bankruptcies and restrictions on short-selling. While the recent events and news are unsettling, one needs to keep in mind that the recent crisis could prove to be cathartic for the global financial system in the long term.

The sharp fall in global crude oil prices and commodities is a positive sign for the Indian economy and could provide flexibility to RBI for managing the monetary policy. We believe that wellmanaged companies with relatively better prospects will attract long-term investors. The Indian companies face headwinds in terms of moderation in economic growth. But we believe that corporate India’s earnings growth will settle at 15-20% over the next three to five years. While economic growth is expected to slacken, India is likely to be among the fastest growing economies.

One of the key lessons for the industry is the need to focus on fundamentals to build long-term sustainable businesses through market cycles. Fund houses with business models concentrating on the equity NFO mania and a large exposure to low-margin institutional assets have to re-evaluate their priorities in order to build a profitable franchise. The AUM chase will peter out, with quality of assets and track record playing bigger roles. It will be a year when past performance will be used as a benchmark. The industry also has to ensure that investors have the knowledge required to make informed decisions.

With a favourable policy framework, the industry could grow at about 15-20% over the next few years, even though sharp changes in market conditions as seen in 2008 could impact flows in the short term. We expect the markets to remain volatile in the near term, but the overall direction should be in tandem with the medium- to long-term fundamentals, which remain strong. We have seen situations like these and believe that they provide a great opportunity to long-term investors like us.

Volatility is an inherent part of stock investing and market gyrations tend to be more pronounced in the short term. Investing through the systematic route is the best way to deal with volatility and benefit from it. As the saying goes, it makes sense to buy during the time of maximum pessimism!

The product range of most leading players is comprehensive. In uncertain times such as these, investors would want stability and simpler products and those focused on absolute returns. In addition, there may still be demand for niche products such as private equity, and those addressing the long- and short-term needs of investors. We could see segregation of institutional and retail investors to ensure that the latter’s interests are protected. On the service front, the usage of technology will be critical and will be more visible in the future. Leveraging technology infrastructure would become crucial for the industry as this would improve efficiencies, ease of access and provide a better service standard to investors.

— Vivek Kudva, President, Franklin Templeton Investments (India)