INSUBCONTINENT EXCLUSIVE:
By Taponeel MukherjeeThe signalling at the Federal Reserve of the US meeting last week that no more interest rate hikes should be expected
during 2019 has ramifications across the globe given the scale of the US economy and the importance of Federal Reserve policy to global
From the perspective of the Indian investment community, there are some crucial takeaways and the reiteration of a few existing
trends.
First, given that global G-10 bond markets have seen a structural bull trend over the last three decades with interest rates moving
lower, from a portfolio allocation perspective, the low long-term bond yields in the developed economies will create significant pressure on
investment portfolios for investment return generation.
Hence, the need to look for alternative mechanisms to boost returns will be even
greater post the Federal Reserve meeting last week
This search for higher yield from developed market portfolios provides an avenue for emerging markets such as India to attract some of the
capital that sits with developed market investors
Relatively dovish central bank policy like the one suggested by the Federal Reserve last week further adds impetus to the trend.
The second
and the biggest takeaway from the signals provided by the Federal Reserve is that the trends such as the availability of large amounts of
capital for investment and the move from institutional investors towards more direct investments are here to stay
As developed economy based investors look towards emerging markets to generate investment returns, India by the sheer size of its market, is
a destination for the return-seeking capital.
It is true that while large institutional capital allocations from the pension and the
insurance industry do consider the absolute level of interest rates, it is as much true that a lot of the significant portfolio allocation
decisions are either long-term or structural given the large portfolio sizes.
Therefore, lower long-end yields in the developed markets
provide India with an opportunity to attract long-dated structural funding for mission-critical businesses and infrastructure
The structural nature of portfolio allocations implies that if attractive investment opportunities are found in India, then the capital
being invested does not necessarily face the risk of "capital-flight" even if interest rates were to move significantly higher in the
developed economies in the years to come
Essentially, greater focus towards attracting investment inflows into India which flow into the Indian economy due to structural
low-interest rate regimes allows India the leeway to attract "higher-quality" capital that is focused on long-term returns.
The single most
significant focus for long-term capital in India must be on the unlisted market and unlisted assets
The greatest challenge for both investors and the government, for obvious reasons, has been directing capital into the unlisted space
In the past, lack of transparency, an opaque pricing mechanisms and regulatory hurdles have all been issues
However, with market instruments such as Infrastructure Investment Trust (InvIT) type of vehicles that help bridge the gap between unlisted
assets and a liquidity provision platform, we are taking steps in the right direction.
Structural changes sweeping across the asset
management industry globally such as the recent decision by the California Public Employees' Retirement System (CalPERS) to approve two
internal private equity organisations is vital for India
CalPERS decision has two significant ramifications.
Firstly, fee structures across the alternative asset management industry are being
questioned as investment returns have experienced downward pressure
The pressure to generate higher yields in the face of higher asset management fees also implies a search for greater-yield
A growing market such as India is an obvious investment destination for such funds
Secondly, an institution such as CalPERS with $354 billion under management will need large economies with a relatively high threshold of
minimum deal size to operate in.
As mentioned earlier, India, given the size of the economy, provides the right opportunities in the right
quantities.
In summary, structural changes sweeping through the world in terms of demographic trends, under-funded pensions funds and
lower-interest-rate regimes are an opportunity for economies such as India to partner with capital providers to help boost
growth.
Signalling by central banks, such as the Federal Reserve, are a timely reminder that the opportunities still exist, and a renewed
focus is the need of the hour.
(The views expressed are personal
Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm
He is reachable at taponeel.mukherjee@development-tracks.com or @Taponeel on Twitter)
