Though 2013 ended with the industrys total outstanding assets under management (AUM) closing at their highest-ever level of around Rs 9,00,000 crore, equity portfolio numbers continue to decline steeply over the past few months. Being driven primarily by strong liquid funds inflows, the industry awaits the return of confidence among retail investors, who continue to exit.
In fact, 2013 also started subdued on account of lack of retail appetite. To make matters worse, investors exited the industry each time the market rose. Institutional inflows remained lacklustre for a major part of the year on account of the not-so-encouraging liquidity conditions. Sometime in the first half of the year, the industry saw a revival in inflows from institutions, HNIs and retail investors in duration debt products. There was widespread anticipation of a rate cut by the central bank, which was expected to generate handsome capital gains to investors.
The rate action by RBI in July reversed the expectation and, along with it, the inflows in such duration debt products. The situation was compounded by fears of reduced inflows on account of the tapering announcement by the US Federal Reserve. The broad trends, however, have not changed much fundamentally. The RBI paused rate hikes in the last policy review, but it has confirmed its intention to up rates if inflation doesnt come down.
Further, there could be a change in the reference rate on the policy front, from the WPI to the CPI, which could make rate cuts a little difficult till consumer price inflation becomes benign. The Fed has announced its first installment of tapering of $10 bn, and promised to go ahead with higher doses if the US unemployment rate comes down further. In the backdrop of such developments, uncertainties continue and fundamental growth constraints remain. The recent flows have been primarily into liquid funds, which is more a function of improved liquidity in the system than new-found confidence in the industry.
Notwithstanding the above worries, we look forward to a better year in 2014. Hopes are based on a gradual improvement in economies, particularly the US. The UK and the euro zone have also started showing signs of growth instead of contraction, which was expected. Nothing perhaps is a better proof of the new-found confidence than the Fed taper, which was always conditional on improved employment data. The fact that this happened, and that Fed governors expect it to continue, is sign of a more confident future for the US economy. The words and actions of the ECB and UK also indicate a positive development.
India has taken major steps to improve the economy. The currency worry appears to be behind us, with the rupee attaining stability. There has been an increase in foreign exchange reserves and the current account deficit appears to be in control. These developments remove worries of the adverse effects of the Fed taper.
With improvements in major economies, there has been growth in exports. Corporate performance data is expected to improve over the next two quarters following an improvement on the demand front and rising exports. There are also expectations of the corporate sector reporting higher profit growth with improvement in capacity utilisation, driven by higher demand.
Recent share buybacks by major MNCs show that confidence in the economy is strong. Retail investors will be back in the market when the confidence permeates the environment. Till then, the market will continue to see a sell-off each time it rises as investors look to recover losses.
* The author is MD & CEO, IDBI Mutual Fund