‘Not having a good pension fund reform can be dangerous for the long run’ - FE

Naval Bir Kumar, the managing director of Standard Chartered Asset Management Company, is a busy man as UBS Securities is acquiring his fund house and he is caught up in the process involved. In an exclusive interview to Avishek Maitra and Sai Prasan of The Financial Express, Kumar spoke on the impact of the persistent higher inflation numbers, hardening interest rates leading to the market volatility, the growing mutual fund industry and the future plans of the fund house. Excerpts:

The market has been quite volatile in the last one month. What is your take on it?

The Indian market right now is mostly driven by global factors rather than domestic instabilities. The markets will get its spine only in April, when the last quarter results start appearing. The market will get some guidance and direction then. On the global level, we believe that at some point of time high interest rates will start impacting asset markets. And, we are nearing the point. Higher interest rates have already impacted real estate and equity prices.

Having said that, we still do not believe that the Indian equity market will behave like a glass ball. The biggest fear, which the Indian investors live with, is that the market will one day collapse and die like they have done many times in the past.

This is the first time when we have had such a long bull-run in the market. We clearly believe that the market have in-built strengths.

Do you think that there is a demand-supply mismatch in the economy that is creating a nuisance?
Our belief of a healthy economy and a leading market is derived from a virtuous cycle. Basically, if there is very high consumption and investments in an economy, then it leads to high demand in the economy which feeds growth either in the manufacturing side or the service sector side. This in turn feeds employment and the employment feeds back consumption. Previously, the economy was in the demand creation side and we witnessed only investment demand. A lot of that demand came from the government sector and not just the private sector, but we had no consumption demand. So as soon as the investments demand impetus was withdrawn from the market the entire virtuous cycle was disrupted and there would be a complete collapse. However, in today’s scenario, we believe that investment demand will always be off and on.

But how much of this demand is coming out of the unlocking of the real estate wealth and sustainable wealth?
Our belief is that there is a fair amount of unlocking of real estate wealth, like selling of ancestral land or property that has occurred. This has boosted spending activity in the current boom. We also believe, on the other hand, that there has been a fair degree of sustainable consumption that has been built up. Another interesting aspect that is being witnessed is the change of demographics. The present generation has now started to earn and spend and is having a very different attitude to money.

Should we look at pension reforms more seriously?
In the absence of any social security arrangement this is the best time to save as they get the benefit of compounding. So, ideally pension fund reforms should have occurred many years ago. If pension fund reforms had occurred decades ago then the balance between saving and spending could have been perfect. Not having a good pension fund reform could be very dangerous in the longer run as the Indian society has moved into a nuclear family mode.

How can the government’s initiative to curb inflation affect the MF industry?
This entire episode has made debt investing look interesting again. Rising interest rates have put a pause in the growth of equity indices globally. Fixed maturity plans (FMPs) are slowly becoming retail products from being purely institutional products. Banks offering more than 10% fixed deposits (FDs) will disappear in some time as we are witnessing more and more retail participation in FMPs than in the past.

How do you think the rising interest rates have affected the credit off-take of the industry?
The corporate sector has many sources for borrowing. The banking sector is one among them. Today, most of the borrowing is from the external commercial borrowing (ECB) route because there is a clear arbitrage between domestic rates and the offshore rates. So, overall I don’t think that the corporate sector is suffering due to rising interest rates.

Sebi has tightened the norms of real estate IPOs. Is it the right time to launch real estate mutual funds (REMFs)?
As a fund industry we need to give our investors a diversity of assets. At an individual level if one has his retirement money or saving money, the best way to grow the savings is through diversification. It is not possible to predict as to which asset class will perform better and for how long. The real estate market is highly complex and hugely overstretched. The basic valuation in this environment is a concern for us as fund mangers.

When will the process of UBS securities taking over Standard Chartered AMC be complete?
We are still in the process of getting all the regulatory approvals. The fruits of the UBS acquisition will happen after the legal ownership changes.

And till we receive the Sebi approval the new sponsor will not play any role in the company. The process will take about six months. UBS has bought over the entire AMC since they want to establish themselves in India.