India is well positioned to regain its share of global GDP. Extreme pessimism over the past few days appears overdone as things are never as bad as they look, and the economy usually turns around and keeps growing. The next 3-6 months will be crucial and should see some recovery. Expect very good opportunity for making long-term investment bets in the next 6 months.
Wealth management and financial services will have to be digital savvy as competition will intensify with the advent of AI and machine learning in investment advisory. That said Human advice will always be valued. Key takeaways are as below:
Global GDP chart from 1AD – China and India had more than 25% share (India peaked at 40%). Average GDP share of China over 2000 years vs today is at parity. India is down to 4-5% and has big catch up ahead.
Thanks to Trump – total pot of GDP is reducing with trade wars and helping India to scale up faster to regain share. India has a good opportunity to regain world GDP share in the near future.
Level of pessimism seen over past 3 days – believes things are never as bad as they look nor as good as they look. Key is your ability to manage transformations.
75% of global sovereign bonds are at yields below 2%, 35% are at negative yield. 10y German bond yield is -0.5% – wondering why institutional investors are investing in it. India is starved for investment and infrastructure with large working population – best positioned to benefit from global liquidity.
First big challenge is to take a bold view – government has that opportunity. They are barely two months in and have a long time to get things right in this term.
Exports – India businesses are uncompetitive – no country has become a great country without exports. Current account surplus is crucial. Indian savers are buying gold which is a big leakage. Domestic savings is exported to buy unproductive gold while exporting good businesses to FPIs which generate very good returns. Best example is HDFC – 500cr market cap in 1982. Over 37 years it has become more than 350k cr. Indian savers had 100% ownership in 1982 which is now 85% owned by foreigners.
On India – Too much effort has been spent in managing the system rather than building a great global business model. Swacch Bharat in financial sector is undergoing right now. Typical Indian way of washing a dirty white shirt – dhulai with soap and scrubbing with brush. While dhulai is good but we don’t want to overdo the dhulai and scrubbing which could tear the shirt. System should be cleansed but care should be taken not to destroy it.
Current situation – Liquidity in the system is 120k cr positive but there is trust deficit in the market.
ILFS journey – framework of governance – six pillars are crucial for well being of any corporate. We cannot move to a sustainable market led economy unless minority investors has confidence on these 6 layers of governance. These are – 1) Management 2) Board of Directors 3) Auditor 4) Rating agencies 5) Institutional shareholders 6) Regulators. We should see significant twist in the tale in next 6-12 months.
Current time is a dream world vs 1982-83. Cant have imagined that India’s financial sector would have evolved as it did. Future is Bright.
Advise for government – 1) We should not take capital for granted. Government should go to investors both domestic and foreign saying we respect your capital. Need to ensure that investors get good returns for their risk. 2) Respect creator of jobs. 3) Need to relook whole layer of taxation for risk capital. 35.8% is tax rate plus dividend distribution tax of 20% plus 10% tax if dividend income is higher than 10 lakhs. Effectively its more than 60%. If you manage to make some return on the investment then you pay capital gains tax. Need to collectively work to fix this maybe in next budget.
Putting short term money into illiquid asset land, infra, real estate created this current issue as cheap money that came in financial system post demon which was deployed in fake AAA rated assets. Once the music stopped – everyone was in trouble. Companies that manage to increase its deby repayments mostly survive the crisis. One with immediate debt maturity usually struggle.
Solution for current economic slowdown – 1) Need to flood market with significant liquidity. Need to deploy steroids in key sectors such as auto. First time seeing 2w, cars and commercial vehicle going down. 2) fix real estate sector – There is no logic for commercial office space to yield 8% and residential 2%. There should be significant correction in residential real estate prices to bring equilibrium or atleast 4-5% yield.
Indian businesses – there is a risk of unknown unknown where audited balance sheet may not show the true picture.
On Institutional investors – enforcement of shareholder rights is important. Would love to see more hostile takeovers where investors vote on their feet. Activist shareholder’s time has come. Fund managers should be independent.
Nuggets of wisdom on career – 1) enjoy what you do. There should be passion in what you do. This is the most important thing. 2) if something is too good to be true then dont do it 3) follow conviction – its better to be stupid now than sorry later.
Need 3 human qualities in financial sector. 1) prudence – no excessive leverage, dont go bust as you build 2) simplicity – avoid complex products – if u dont understand any product please dont sell it to your customers 3) humility – financial service is not the centre of the universe – be humble.
Time management – keep urself clutterless so that u can do what is important. Leaders should delegate authority while keeping full accountability.
(Speech delivered at CFA Institute India Wealth Management Conference)
Solution for current economic slowdown –
- Need to flood market with significant liquidity. Need to deploy steroids in key sectors such as auto. First time seeing 2w, cars and commercial vehicle going down.
- Fix real estate sector – There is no logic for commercial office space to yield 8% and residential 2%. There should be significant correction in residential real estate prices to bring equilibrium or atleast 4-5% yield.