The year 2013 was a challenging one for the Indian economy and financial markets. The economy faced a number of challenges, such as a widening current account deficit, a weak currency and sticky inflation. There has been significant polarisation in market returns, with exporters and domestic consumption sectors like IT, pharma and fast-moving consumer goods doing exceedingly well and others, such as real estate and capital goods, underperforming.
The debt and currency markets took a u-turn in May, seeing a spike in yields and a sharp depreciation of the rupee, only to stabilise at the end of the year. Investors have been shunning equities in favour of bank deposits, gold and real estate. In five years, bank deposits have increased by R42 lakh crore as against outflows of R67,000 crore from equity mutual funds.
The mutual fund industry has done relatively well in this tough market environment. Assets under management (AUM) of the MF industry have grown from R7.6 lakh crore as on December 31, 2012 to R8.9 lakh crore as on November 30, 2013. The growth in AUM has been in the fixed income category, especially fixed maturity plans and liquid funds. Equity funds and gold ETF saw their AUMs and folio count falling. The MF industry has lost close to 40 lakh equity folios, which is a very disturbing sign.
Over the last five years, foreign institutional investors have invested $90 billion and domestic mutual fund investors have redeemed $13 billion. This shows that Indian investors have not taken a long-term view on the market and are chasing asset classes that have done well in the last one year.
However, 2014 looks promising for the mutual fund industry as some of the regulations put in place will positively impact the industry. First, participation of distributors on exchanges will help increase penetration in smaller cities. Second, the proposed regulations on real estate investment trusts may open a new investment avenue for the industry and the MF utility platform will make it easier for investors to invest across funds.
At the current juncture, the equity market is trading at about 15 times FY15 earnings, which is close to its long-term average. However, there are two adjustments required. The current P/E should be seen in the context of depressed earnings across many sectors, where mean reversion is yet to take place.
We are positive on equity markets and believe that in 2014 we will see the full impact of positives such as oil reforms, a good monsoon, correction in commodity prices and the improvement in the global economy.
The key risks would be a sharp increase in oil price and lack of government stability following the elections.
In 2014, overall rates expectations are likely to be derived from the currency perspective and the Reserve Bank of India may focus on real interest rate enjoinment in order to protect further currency depreciation.
The emerging growth inflation dynamics and the effect of upcoming elections on the fiscal situation will dictate the direction of interest rates. Since the yield curve normalisation has started, the spread between the shorter end and longer end will get reversed. In this scenario, the shorter end of the curve will outperform the longer end.
Investors should increasingly look at global funds for diversification. The industry AUM is very low in this category and investors need to allocate more capital to international funds. We would advise investors not to get deterred by macro noises and invest in a disciplined way. Many a time, the action required is ?nothing?, i.e, . simply following well-disciplined asset allocation with planned diversification.
Jisang Yoo
* The writer is CEO, Mirae Asset Global Investments (India)
