'India must resolve policy paralysis to revive the economy'

Calendar 2014 has been one of the best years for the Indian equity market, which has gained not only on foreign flows but on hope that the new government at the Centre will resolve ‘policy paralysis’, which in turn will help revive the economy.

UTI Asset Management Company Managing Director Leo Puri tells Puneet Wadhwa we are still getting the benefit of the doubt, as the government is still young.

This phase can go on till February or March.

At a global level, the risk of the benign economic environment, which India has benefited from, seeing some volatility in mid-2015 remains reasonably high, he says. Excerpts:

How long do you see liquidity injection supporting markets, and are the markets factoring in a rate hike by the US Federal Reserve in 2015?

Currently, we have only one engine supporting the global economy: The US. Europe, Japan and even China have all been hit by problems; their respective economies have been slowing .

The revival one had hoped for in Europe has clearly been postponed. Japan is still in uncertainty.

There is always a big risk when you have only one engine of growth powering the system.

The risk of the benign economic environment we have benefited from seeing some volatility in mid-2015, when some reversal of liquidity is likely, remains reasonably high.

I don’t think the US will raise rates in a way overly disruptive but the rest of the world could still be at a relatively weak position at that point.

We have seen in the past that the US ultimately acts in a manner that suits its own policies at a given point in time. I am not clear how much attention they will pay to the woes of the rest of the world. So, we have to pretty much look after ourselves.

I am glad the Reserve Bank of India (RBI) has adopted exactly that view and not grown complacent only because we have a benign environment today.

If it were to turn stormy, be assured we will have nowhere to turn to. No one will run policies to favour us.

Thus, we must ensure our economic fundamentals remain robust. RBI is trying its best to ensure this.

Do you think slowing growth in China, the euro zone and Japan can disrupt the rally in global equities? What is the probability you attach to this over the next six to 12 months?

There is a realistic probability that one will see volatility in early or mid-2015 and that is a function of the risks mentioned.

This is compounded by commodity price fluctuation, which seems good for India in the first instance, as the movements are sharp, while they also add to the geopolitical risk in the system.

We have to be a little careful that we don’t get too complacent on that front, either. What is less evident at this point is the extent to which it will affect India.

Whether it can derail us from the very sweet spot we are in, supported by a benign macroeconomic environment, is uncertain.

If we get our investment cycle moving and demonstrate the capacity to absorb investment and provide a good return, we have a chance to be a relative safe harbour if that disruption happens.

So, the urgency of getting our house in order is greater.

It will not take a lot for the rupee to, otherwise, again come under pressure. We are seeing that the South African rand and the Turkish lira are under pressure — and both these countries are oil-consuming ones. It is not only the producing nations like Russia whose currencies have been beaten down.

This contagion could be vicious if we are not able to continuously differentiate ourselves.

Today, we are still being given the benefit of the doubt, as the government is still young.

This phase can go on till February or March. I am not sure if we can ride it indefinitely.

Do you think the Indian market can replicate in the next calendar year the gains it saw in 2014?

It is a function of how key macro variables play out. I think the underlying growth potential of the economy is seven-eight per cent if we play all our cards right.

If that happens, we still have room for earnings expansion, supported by an investment cycle kicking in.

But today, you have only single-digit credit growth and expectations that have moved ahead of an upturn in the economy.

If there indeed is evidence of a pick-up in investment by March-April, the rest of the year will be positive.

However, it will not be smooth sailing. There will be either an acceleration on the basis that we have been able to differentiate ourselves successfully or the risk of not meeting expectations.

So, we will see binary outcomes. At this time, the betting is still on possibly gaining momentum.

But there are definitely risks to the downside which will be evident around March if we don’t make reasonable progress.

What are the evident risks?

At this point, there are three types of indicators. In terms of financial indicators, clearly the beginning of the investment cycle is key and that has to be in evidence in terms of capital raising, etc.

The second indicator which is linked to this is the ability to resolve the problem of stranded capital in the system.

That is, the stranded/stalled projects.

This will, in turn, reflect on banks’ balance sheets and the need for recapitalisation.

We haven’t heard much on bank recapitalisation recently.

That could be because of a fall in credit growth.

We hope the credit growth will rise and that is how we will support the investment cycle.

Banks need to recapitalise in time to support this. The willingness to undertake overdue reforms are the third indicator – whether it is the GST (goods and services tax) or resolution of battles in coal and spectrum allocations, which will provide evidence whether we are committed to good and predictable governance.

I am optimistic we will see evidence of this but, if we don’t, there are risks to the downside.

Are you looking to participate in the government’s disinvestment programme? What is the war chest that UTI MF has built for this? Are you targeting any specific issues/companies?

We don’t participate in programmes but are interested in stocks and companies on offer.

In case there are issuances that we find interesting and feel those could generate good returns for investors, we will buy those.

We don’t have specific plans for participating or not participating.

It entirely depends on the companies available and the growth prospects of those companies. We do have a broad list of companies, including ONGC and Coal India, where the government plans to sell stake?

Does anything interest you?

We will evaluate those. We do hold some of those companies already.

It is a function of where the portfolio balance is for a specific fund and the fund managers’ view on whether or not to alter the weight.

But at this point, one has to be cautious in general on some of the names in the broad list. The finance minister has promised a big-bang Budget in 2015.

What are your overall expectations and those from the mutual fund industry standpoint?

There is always a debate as to how much one relies on the Budget to indicate reforms.

But the fact is that it is now becoming an annual ritual in India where we expect to see some linkage between government reforms and the Budget.

There are market expectations and the FM will have to respond to those. In the interim Budget, there were placeholders put down. Completion of the commitment to rolling out GST is clearly something I would highlight as very critical for the credibility of the government.

Announcements around liberalisation of FDI (foreign direct investment) need not be linked to the Budget.

To the extent that this process is also taken to a logical conclusion, it will be a positive. I do not expect anything significant in terms of taxation.

But given that the fiscal deficit continues to need attention, there could be some renewed focus on disinvestment.

Disinvestment, according to me, is less about selling shares; what I would really like to see is a strategic statement on when and how the government is going to detach itself from being engaged in a number of sectors where there is no purpose being served by government ownership.

And I think that will be a genuine reform and not just a capital-raising exercise.

This is something being hinted at and they have had some time to frame policies.

Whenever the government undertakes this exercise, there can be some controversy around it.

But the whole purpose of having a strong government is that it can take strong measures. I would certainly like to see how we move on that front.

Don’t you think it’s about time we addressed concerns in the banking sector, since it is a proxy to the economy?

There have been a number of recommendations for the banking sector and how critical it is to redefine governance norms.

I would be delighted if there were positive moves to actually reform governance in the banking sector and review the ownership structure.

Redemption of units from equity mutual fund schemes saw a sharp rise in November. Is this an aberration or are investors losing faith in the rally?

It is quite natural that some investors will cash out when there is a sharp rally. Whether it means losing faith or locking in gains is difficult to say.

If the exit happens because the investor is mis-sold or misguided, that is a bad thing. Buying and holding forever is not the purpose of investing in a mutual fund.

I agree we don’t want to churn people through mutual funds but it is actually a legitimate use of an instrument like a mutual fund to take a view on the markets, achieve a goal and exit.

What is the road ahead for the debt segment?

The current consensus is clear, that we do expect a review on rates in early or mid-2015, and that is already being priced in.

A number of investors have started taking a view on duration bond funds to position themselves.

I think that is a good move. RBI has been right to actually take a strong line on holding rates because toning down inflationary expectations is hugely important in providing a stable foundation for future growth.

If some of the risks materialise at the global level, the rate reduction may get postponed and the currency will be under pressure.

But for now, I would say the most likely outcome is easing rates perhaps around March, so investors will benefit from having positioned themselves in a duration bond fund.

How has calendar 2014 panned out for UTI Mutual Fund and what is the strategy for 2015? Is UTI looking for acquisitions?

We have seen a good 2014 in terms of putting our strategy and direction in place and then beginning to execute against that backdrop.

It has been helped by the very buoyant capital market and the strong political context in which we are.

So overall, both in terms of our efforts at internal transformation and market support, it has been a very good year.

Our primary goal is to be a preeminent, independent asset manager.

In that context, most of growth is likely to be organic because we do see the industry’s underlying growth going ahead to be 15-20% (though it could be in a higher range in some years and a lower range in some others).

Given the industry structure, I would not be surprised if opportunities are available for acquisition, and we certainly would be very interested in pursuing those that make sense for us.

There were some talks about an initial public offering (IPO) demand from UTI MF. Can you update us on the latest development on that front?

There has been some discussion on that in the public domain. From our perspective, we think it will be very beneficial for the institution, because a listing will ensure we get strong corporate governance, and a strong board; these will help us.

It would also give us currency, in case we needed capital for acquisition, besides strengthening our profile in general, with our investors as well as stakeholders.

So, it has plenty of benefits for us. And, importantly, it will offer an exit to the shareholders who have supported us over the years; they will benefit from the price discovery the listing offers.

The markets are good and we think an offering will be received well.