The domestic equity markets have been on a downward journey. It is not just overseas investors, domestic investors too seem to be miffed with the Union Budget. Radhika Gupta, chief executive officer of Edelweiss Asset Management Limited (EAML), tells Kumar Shankar Roy about the road ahead. Known to be a straight talker, Radhika pin points the reasons behind the sluggishness that is gripping the economy and asks investors not to panic.
Markets have been negative since the Union Budget. Why is there so much negativity?
I would say a combination of factors. You have a long period of liquidity crisis triggered by the IL&FS event. We have seen some action on that front. But between the number of defaults that have happened, we may not have seen the kind of action that should have been taken. That is one issue. Equity markets have been weak, but we should actually focus on the sluggish economic growth. This a big issue. India has been a growth driven economy. There is sluggishness across the board be it consumption or private investment.
The surcharge on FPIs and Alternative Investment Funds (AIFs) announced in the Union Budget and the government's reluctance to change the policy is a key factor. I think that has been a big issue. I say this because issues like credit market and economy can come back because they regularly go through cycles. But India needs to have a stable tax regime for foreign and domestic investors. It's important.
Our interactions with market participants show that they like the execution capability of the current regime. The income tax surcharge was done to raise more taxes. Even if this is painful, why does the market want the government to rethink?
In the matter of FPIs, it is unintentional. As we understand, the intention was to tax individuals. The intention was not to tax corporates and foreign investors.
But is it fair to differentiate between domestic and foreign investors?
It is not about foreign or domestic investors. Even category-III AIFs will be impacted by the new regulation. They are domestic investors. The way to do this (implement enhanced surcharge) could be to exempt entities like Sebi registered FPIs and AIFs.
A year back when questions were raised about slowdown, we were asked to look at the growing airline passengers and hotel room occupancies. Has that changed now? Where is this slowdown coming from?
A part of it is coming from the lack of understanding of the importance of NBFCs in the economy. NBFCs provide liquidity to segments like SMEs and auto sectors. These segments will invariably be hit due to liquidity crunch. We did not realize this during September-December last year. A few months later, the impact is showing.
What are policy responses that markets would like to see to manage the situation?
The RBI has been on a rate cut spree. Whatever needs to be done to resolve the liquidity crisis has to be done. Some steps have been taken in this direction, but they need to ensure transmission happens fast. NBFCs should get liquidity and they should get it fast. Some of the measures taken around taxation need to be relooked. Many years ago when the Euro was in crisis, Mario Draghi had made positive statements like 'whatever it takes will be done'. Those words changed the direction of the situation as it gave confidence to markets that the authorities are willing to take all steps to resolve the situation. Positive commentary like 'we are going to do whatever it takes' will help. A statement like 'India is an attractive place for foreign investors' and 'we are looking at the tax issue and we are open to feedback' can really help, of course it should be backed with some meaningful action.
It is natural for investors to be worried when markets are in a state of flux. What is your advice to mutual fund investors?
We have been telling investors about the importance of having a good financial advisor. Nothing substitutes that, especially in times like this. Investors should not panic. If you are already invested in the market, it is natural to panic but we must remember that India goes through cycles and there are downturns every 5-6 years. We have seen such times in 2013 and even 2008. So, we are telling SIP investors that you are benefitting from SIPs because you are buying more now due to rupee cost averaging. Money is made when you are a little counter-cyclical. But rules of investing do not change. Investors should stick to their asset allocation and do their SIPs. One should also use any good opportunity to do lump sum investments. We cannot say markets have hit a bottom, nobody can say that. But what we can say is that the risk-reward ratio in the mid and small cap segment has turned much better compared to a year-and-a-half ago.
On the fixed income side, we have been hearing about AMCs telling investors that now is a good time to buy credit risk funds. What's your advice?
My thoughts on debt are basic. Investors' understanding of debt is less compared to understanding of equity. This has been an extraordinarily tough period for credit markets. Anybody investing in fixed income should ask why they are doing fixed income. Many people do fixed income because of capital preservation, but they do not understand credit risk. Credit risk should be fully understood and it is not just 50-100 basis points extra return.