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Investors’ Choice: The Needle Moves North for Financial Assets

The time has come for India to create its own financial power houses like Nomuras and Morgans of the world

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Over the past one year, there has been a course correction in the behaviour of domestic investors. Even the conservatives among them have been developing cold feet towards the traditional safe havens when it comes to allocating their money among different asset classes.  The conventional approach to investment that used to tip in favour of tangible assets such as gold and real estate are fast losing their charm. The story remains the same when it comes to investing in less risky debt instruments. This is even true for the benchmark sovereign bonds as well.

Investors prefer to unwind their positions in these conventional investment choices and like to park their money in high-return equity-linked financial assets, even though the benchmark indices seem to be defying the law of gravity and trending at their historical heights raising concerns about an impending correction.

What tilted the scale in favour of equity-linked financial assets is a spate of factors that have been playing out in the domestic market. But the primer for this paradigm shift in investors’ behaviour was the watershed episode of cash ban in December last. The weeks that preceded and proceeded the government’s game changing decision set off a chain of reactions, which were neither foreseen nor expected.

The demonetisation has led to a sudden spike in bank deposits with individuals rushing to banks to fill their accounts or open new accounts with the hoards of cash from their safe lockers. This sudden gush of liquid money into banks’ vaults glided the conventional lenders into a moral hazard. Already bedevilled with the task of deleveraging balance sheets on top of a tepid credit growth, commercial lenders’ slashed deposit rates across the board to steer clear from asset liability mismatch.

This has made bank deposits, especially the fixed deposits, less attractive for savers. They moved the money from banks to mutual fund. With loads of money suddenly pouring into their books, Mutual Funds have started pumping this cash into equity-linked schemes with a choice left to investors in picking funds according to their risk appetite. What followed is a sustained bull run with benchmark indices hitting new peaks on periodic intervals sans some corrections.

An interesting corollary of the market rally is that the there has been a role reversal for foreign institutional investors (FIIs) or Foreign Portfolio Investors (FPIs) who were playing the role of pied-pipers by moving the market with a drop of a hat.  Despite a massive pull back by FIIs citing an overheating market marked by highly pricey stocks, the market rally continued.  The trend reversal consummated in the return of FIIs to re-join the on-going market rally fuelled by DIIs.

The moment of reckoning for the country came when Moody's Investors Service (Moody's) finally bought the “India Growth Story is Here to Stay’ pitch and upgraded the Government of India's local and foreign currency ratings a notch to Baa2 from Baa3.The reluctant rating agency also changed its outlook on economy to stable from positive. Moody's has also upgraded India's local currency senior unsecured rating to Baa2 from Baa3 and its short-term local currency rating to P-2 from P-3.

The decision to upgrade the ratings is underpinned by Moody's expectation that continued progress on economic and institutional reforms will enhance India's high growth potential. This will bring the much needed relief to rupee and bond markets and bring back the foreign capital.

The rating upgrade will give a fillip to investors’ churning their portfolio in favour of equity-linked schemes. The low yielding bonds along with a muted outlook for property market and gold will whet investors’ appetite for financial assets.

The binary of the story is the value unlocking by industrial houses and the making of non-banking financial conglomerates by forging alliances.  We too are pretty bullish on the prospects of financial services industry as investors move away from physical assets to financial assets which has been growing at a reasonable rate. The domestic financial behemoths are well-positioned to tap into growth opportunities that this trend might throw up.

Recent transactions signal increased investor interest in these businesses amid value-unlocking by companies. Some deals include Fairfax Financial Holdings Ltd, via its Mauritius arm, hiking its holding in IIFL Holding and Edelweiss Financial Services setting up general insurance company.  

Therefore, the time has come for India to create its own financial power houses like Nomuras and Morgans of the world.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Tags assigned to this article:
Year End 2017 financial assets Demonetisation

Mahesh Singhi

Mahesh Singhi is the Founder & Managing Director of Singhi Advisors. Mahesh has spent over two decades in the Corporate Advisory and Financial Services sector, servicing diverse clientele across project consulting, project finance, private equity, venture capital and investment banking & building up Singhi Advisors from ground zero to one of the leading M&A Advisory Firms in India.

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