Industries need to work hard to attract investors

The capital market in India will mature further and will play a key role in attracting funds to fuel the economy in the coming two years and beyond. And mind you that the capital market is just a barometer of the underlying economy. If we take away that pinch of speculation and tremors created by the sudden flow of liquidity, the capital market is just a true reflection of the underlying economy, feels Pankaj Singhania, Founder of Lakewater Advisors, one of the leading SEBI-registered portfolio management services (PMS) enterprises. Speaking to Ritwik Mukherjee of Bizz Buzz, Singhania, a chartered accountant and a former civil servant (IRS) with close to three decades of experience, shares his thoughts on the impact of the pandemic on the Indian capital market, outlook on the Indian economy and much more

To fuel a GDP growth of 8%, we need to attract a huge foreign direct investment. And in the new set of things, we will be facing more stiff competition with other SE Asian countries. How fast we carry out various reforms will remain another major challenge

The index is not really an indicator of the broader market. These indices are largely driven by a handful of stocks. There is a larger market outside these index stocks waiting to be explored and there are always hidden opportunities in the broader market

What has been and would be the impact of the pandemic on the market in the short to medium term?

The market in the short term will be driven more by liquidity than fundamentals. Further, the pandemic has impacted different industries differently. It had a positive impact on IT and at the same time negative on travel and tourism. We often go wrong when we consider the market in unison. It has so many segments that have been impacted quite differently in this pandemic. The market will be positive or negative depending on which side of the market we are in. Largely, uncertainties created by the pandemic are under control with the launch of the vaccine and largely we got adapted to our new way of working.

What is your outlook on the Indian economy and the capital market, given the current overall situation?

The capital market is just a barometer of the underlying economy. If we take away that pinch of speculation and tremors created by the sudden flow of liquidity, the capital market is just a true reflection of the underlying economy. Our GDP growth has been among the highest in the world in the past decade, regularly achieving an annual growth of between 6-7 per cent. This was mainly due to the wide range reforms and technologies that have improved the efficiency and productivity. With a strong political will at the Centre, reflected by the passage of multiple reform Bills and subsequent handling of criticism, has instilled a strong confidence among the investors. A large inflow of foreign capital in the past couple of months shows the growing confidence of investors in India. The recent passage of agri bills will bring far-fetched results in the agri sector, which was lagging till now. We can expect a huge inflow of funds in the agri sector once the ongoing protests are convinced and settled. Further, we will be the biggest beneficiary of diversification of the manufacturing base and supply chain logistics from one country to a diversified location, compelled by this ongoing crisis.

What are the main concerns about the market at this point of time and why?

The market at this point is mainly driven by liquidity. The market to sustain should be supported by financial numbers. The industry largely has adjusted to the new way of working though the uncertainty caused by the pandemic is largely over the concern about the effective administration of the vaccine to all will remain a major challenge. To fuel a GDP growth of 8 per cent, we need to attract a huge foreign direct investment. And in the new set of things, we will be facing more stiff competition with other SE Asian countries. How fast we carry out various reforms will remain another major challenge, considering the ongoing protests against the recent agri reforms.

How are the institutions / FIIs looking at India now? Will this outlook continue?

The institutions/FIIs look for opportunities and India is the most-promising destination for them. A strong political will and a business-friendly government have instilled new confidence in them. Now, whether this outlook would continue depends again on the long-pending issues like cutting down red tapism, speeding up the judicial process, pending labour reforms, digitisation of clearances and compliances.

Do you think there are some opportunities in the market in the present situation?

Opportunities are always there in the market. The index is not really an indicator of the broader market. These indices are largely driven by a handful of stocks. There is a larger market outside these index stocks waiting to be explored and there are always hidden opportunities in the broader market.

How do you see the next phase of mutual funds growth in India?

With the interest rates going down, what are the options left? Definitely, the MF industry will see a big growth from here but then the industry has to work to win back the investors' confidence. I have often found investors not asking for very high returns but constant and safe returns. If the MFs are able to manage the risk in a way that returns are above the bank rate but give returns consistently, I think it has a big future.

Where do you see the AIF industry and what is the future?

It's just the beginning of the AIF industry in India. It is one of the investment options with a large space for diversification and hedging strategies. Hence, I see this as one of the most-attractive investment modes. One thing we should not forget is that these are all various investment techniques and not an asset class in itself. I have found investors often misunderstanding these as an asset class. There will be a huge difference in the returns of one AIF to another depending upon the people who are managing these funds.

How do you propose to differentiate between a traditional MF and the hedge fund space?

Hedge funds are known for using higher risk investment strategies with the goal of achieving higher returns for their investors. They target to give returns in both bear and bull markets by deploying various hedge strategies, whereas the MF performance is correlated to the performance of the underlying stocks. But then, hedging has associated costs.

How should hedge fund strategies be designed?

There is no sure way to choose the best available options when hedging stocks. Every fund manager has his/her own techniques depending upon several factors. And every situation requires different techniques. For investors at large, I would suggest keeping their portfolios diversified and that is the best hedge strategy.

Where do you see the Indian capital market two years from now?

The global growth is shifting eastward. The shifting patterns of domestic growth, consumer demand and investment flows mean that an increasing number of companies with a global outlook looking to tap the stock exchanges for capital will come from the emerging economies like India in future. Hence, the capital market in India will mature further and will play a key role in attracting funds to fuel the economy in the coming two years and beyond.

Which are the sectors you would bet on at this point of time and why?

We believe that the tech industry is in for a sea change, leading to a potential multiplication of demand for tech-related goods and services over the next decade. Second, the recent agri reforms making consolidated contract farming possible will fuel large-scale consumption of agro chemicals. Third, NBFCs have expansive reach as compared to the banking system of our economy and it will provide credit facility for small needs of the unbanked and rural sector of the economy. Further, the Indian banking sector has been facing a lot of trouble over the past few years due to the burden of NPAs and this scenario has opened up a new perspective for the NBFCs.

How would you pick up your own investments?

There are enumerous factors that come into play while making an investment decision and it is difficult to put in black and white. But I can highlight the broad parameters that we consider in picking up an investment. We are a constant observer of the major trend setters, changes in social behaviour, lifestyle changes, crisis and related solutions, innovations, rather than look for an industry benefitting out of it. Than the major players in the industry, in players we look for integrity and corporate governance. Innovation in both the product and the processes should be the culture of the company as we believe that a company which does not constantly innovate can never give a consistent growth. It is a company's innovation that drives its growth. Asset-light and debt-free are the other parameters that we look for.

How would the investors handle their investments for near future and your advice to the retail investors?

I would advice the investors to keep their investments diversified and allocated to various asset class - largely fixed interest-bearing instrument, commodities like gold, real estate and equity. Further, I would advice the retail investors not to invest directly in equity and take services of platforms like MF, PMS and AIF with proven track records.