India |
|
| June 2008 |
Welcome
Jervis Smith
Managing Director, Global Head of Managed Funds & the Middle East, Financial Institutions Group, Citi
It gives me great pleasure to introduce our Indian edition of Spotlight. While there may have been recent volatility in India's securities market there are still many international asset managers examining the possibilities of setting up local operations.
Clearly, the market is still expected to bear fruit. In this edition, Debopama Sen, India Securities Country Manager for Global Transaction Services, Citi, provides a balanced, on-the-ground view of India's recent financial market developments.
Additionally, we are privileged to have a contribution from Gururaj Rao, Chief Executive Officer for the Kuwaiti Indian Holding (KIH) Company. Mr. Rao's interest in India makes for a candid review of KIH's presence in the market and highlights the Middle East's interest in the Indian market.
Overall, the economic churn from the US, and its counterparts, continues to raise questions, yet, India's middle class continues to assert itself. The desire to succeed is evident. For firms in, or entering, the region; careful talent management and market liberalisation are important while dedication to the market is paramount.
Funds line up to enter India
Debopama Sen
India Securities Country Manager, Global Transaction Services, Citi
A move by India's regulatory authorities to put out the welcome mat to hedge funds nine months ago is paying dividends. In the first four months of 2008, the number of international investors that obtained registration as Foreign Institutional Investors (FIIs) surged by over 160.
This figure compares with approximately 220 registrations for the whole of last year. Moreover, half of which are hedge funds - an impressive number given a stock market correction that has brought share prices back by around 20 per cent from their January 2008 peak.
At the same time, between 10 and 15 international asset management firms are in the process of setting up domestic funds. They will join some 34 firms already offering mutual funds in a market that has grown from around USD10 billion, five years ago, to over USD130 billion in 2008.
A number of factors combine to make India an attractive destination for foreign investment flows as well as asset managers seeking growth markets. The economy has grown at a compound rate of 8.7 per cent over the last five years, prompting growth of close on 40 per cent a year in the stock market. Even after downward revisions to forecasts, the economy is expected to grow by 7.7 per cent in 2008/09. In line with the global economy, this is a slowdown, not a slump.
Modernisation and liberalisation of the markets are also helping. It is now easier for new firms to apply for FII status. New derivatives products are planned and short-selling was recently permitted. At the same time, stock lending and borrowing has also been introduced - though only in fixed size contracts with seven-day tenors. Citi has been coordinating the response of international investors who want to see a more flexible system. The Securities Exchange Board of India (SEBI) has also given the green light to direct market access and a number of brokers are now introducing 'no-touch' trading platforms for their high volume clients.
For asset management firms, the Indian mutual fund market offers huge potential. A small, but growing share of new household savings is finding its way into equities - either directly or via mutual funds and insurance products. But the key is the expected growth of India's middle class. A report from McKinsey & Co. (The 'Bird of Gold': The Rise of India's Consumer Market, May 2007) forecasts that middle class households will make up 41 per cent of the population by 2025. That compares with around five per cent today and will equate to 583 million people.
There are big opportunities here for asset managers. India's savings rate remains high at around 30 per cent of GDP, but historically only a small proportion of savings has found its way into the equity markets. That is changing. 'There is a lot of untapped domestic demand for equities', says Ms Sen. 'Interestingly, this is the first downturn where redemptions have been modest. Investment flows have continued to be positive. There is no sign of investors backing off.'
There is another big prize on the horizon for asset managers who establish themselves in the domestic market. 'One day, Indians will look to invest in their offshore products,' says Ms Sen. 'The restrictions on overseas investment have recently been relaxed, allowing local investors to invest up to USD200,000 a year in foreign property and equities.
So far, very few people have taken advantage of this new opportunity. Up until a few months ago, the rupee had been strong against the dollar and local market returns have been high. But diversification will become important as equity investments grow.'
The case for entering the domestic mutual fund market is a similarly strong one. The expected size of the emerging consumer market is unprecedented. A high savings rate and a fast-growing middle class underpin demand for mutual funds. A growing share of new household savings is finding its way into the equity markets - either directly, via retail insurance products, or through mutual funds. Restrictions on overseas investment by Indian nationals are being relaxed, opening up new marketing opportunities for international funds.
Ultimately, the appeal of India remains as strong as ever. It is now up to those managers either established in, or looking to enter, the market to choose their strategy carefully. Their battleground will be among the aspirational middle-class. Their target? The growing spending power of this fast-growing segment.
India - settled for the long term
Gururaj Rao
Chief Executive Office, Kuwaiti Indian Holding Company
As an investor in the Indian market I was not displeased at the 20 per cent pullback in the local stock market since January of this year. Interestingly, this coincided with my appointment as CEO of the newly formed Kuwaiti Indian Holdings (KIH).
When KIH was formed we raised an initial USD110 million to invest equally in Indian listed companies, unlisted companies and real estate. Although a great believer in India's long-term growth story, I believed the stock market was overvalued in January 2008. In fact, I honestly believe that a rating of 25 times earnings is not sustainable for any market and the subsequent fall vindicated our decision not to rush in. However, while existing FIIs have been selling the market heavily, withdrawing USD4.5 billion since January 2008, there has been no shortage of new investors keen to invest in an economy slated to grow at over seven per cent a year for the foreseeable future.
To support these developments, the Indian authorities, in conjunction with the custodian banks, have worked to transform the market from what was an entirely paper-based settlement system into one that is completely dematerialised. Moreover, providers, such as Citi (the leading foreign global custodian bank), have taken this move to efficiency one step further by automating and simplifying the day-to-day processes of their securities clients through its complete range of securities and fund services - local and global custody, fund administration, middle- and back- office solutions, asset servicing, structured FX solutions.
KIH is 57 per cent owned by Noor Industries, which is itself an offshoot of National Industries Group - the largest industrial conglomerate on the Kuwait stock exchange. The company is one of around 160 international firms that have applied for, or received, Foreign Institutional Investor status in India this year. KIH will have three roles within the Indian economy. In addition to investing our own balance sheet, we will act as a window for the rest of the group, which manages more than USD10 billion in client money. We will also look to bring Indian talent and services to invest in Kuwait. However, our long-term objective is to raise money from third parties to invest in India.
Having spent 15 years with the Kuwait Investment Authority, the chance to manage a business investing in India was irresistible. India is a region that I am passionate about and KIH's efforts are beginning to bear fruit as we hand out our first mandates, to local investment managers, to look after the quoted portfolios.
The target sectors for KIH comprise oil and gas, power, health and education. Yet, it is the aspirations of the rising middle class that motivates us. Yes, the younger generation want to look good. Yes, they go to the gym. They also want the best for their children. Only by understanding such market trends can we continue to invest in the manifestations of this Indian phenomenon.
To succeed in any market you need the appropriate skills and connections. At KIH we have just the right blend of personnel. We understand the growth areas, such as real estate - where we are investing mainly in residential property. Moreover, this is an area in which we see extraordinary growth potential.
Despite our belief in the Indian economy it important to retain a bird's eye view. The Indian market could have a further 10 to 15 per cent downside yet. But, of course, you never really get in right at the bottom. Do you?
