Confidence in the Future

Suresh Soni began his career with SBI Mutual Fund in 1993, before moving on to Sundaram Mutual Fund and then to Kothari Pioneer. He joined Deutsche Mutual Fund when it set up operations in India in 2002. Soni started off as an analyst and continued to work in different roles on the investment side. Six months ago, he gave up the role of CIO to take over as CEO.

Deutsche Mutual Fund has always maintained a strong focus towards debt funds. Is it because your business is institutional oriented?
When we launched our schemes in 2003, we did so with both equity and fixed income products. We have had more success with our fixed income products, and this was for a number of reasons. We had a relatively small team so it was easier to penetrate the institutional market, as opposed to getting through a large retail distribution mass which requires more feet on the street. So for the first few years our focus was on the institutional space.

Having said that, we have also had a major expansion of our retail footprint in the last two years. We expanded our distribution network, opened many more branches and increased the number of employees. Around two years ago, we had between 500-600 distributors. Today, that number is over 7,000. Similarly, our investor base increased from 50,000 two years ago. We have 200,000 investors today

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Like our fixed income funds, our equity funds have also put up a good showing. Your publication ranks two of our equity funds five-star. Sound performance coupled with a rapid expansion in the retail space have helped us grow our equity funds in last few years. Despite the fact that the market fell by 56 per cent, we are one of the few asset managers in India to see a net accretion in our onshore equity assets in 2008.

Have the increase in the number of investors been in equity or debt schemes? And has the growth been in retail or institutional?
We have seen an increase in the number of investors in both the equity and debt segments. There has also been an increase in the number of retail clients. The retail base tends to be a strength in a volatile market. In the last couple of months, we have seen a strong growth in our institutional segment as well. Our money market and bond funds have also grown significantly.

Has this market downturn hit your plans?
Compared to our peers of a similar AUM size, we have a relatively modest team here. We have always been cautious in our expansion, and will continue to be so as we roll out our growth plan in India.

You say your assets are growing but your investment management and research team is rather small, is it not?
We have a seven-member onshore investment team. All our investment professionals have rich experience, having been through the market cycles. The average experience of our investment professionals is over 10 years.

On top of that, our local team in India is able to leverage Deutsche's global research platform and a wide spectrum of resources. In a competitive market like India's, it is a great asset to be this globalised. At the same time, our team is well supported by local sell-side analysts. Being a large international house gains us access to company management and the best broker research available in the Indian market.

A number of investors are beginning to consider index funds. Do you think that the days of fund managers adding alpha are over?
I seriously doubt that. Just because the industry and the market went through a bad year, it is not fair to say that fund managers cannot generate alpha. And fund managers in India have demonstrated it consistently over a period of time that they indeed add alpha. To illustrate - as at end-December 2008, the DWS Alpha Equity Fund has delivered 28.39 per cent in compounded returns since its inception on 21 January 2003, vis-à-vis the 18.51 per cent generated by NIFTY in the same period. That is a strong out-performance of close to 10 per cent per annum. This attests to Deutsche's track record of delivering in both bull and bear markets.

Do you think 2009 will be tough?
On the fund performance side I am not unduly worried. While the market on the whole may not do much, there will be sectoral variations within the market which can be significant, as well as individual stock performers whose performance will differ significantly from the rest. The market has become a lot more discerning and demanding in the current environment, and this will bring out differences even more starkly. So if a fund manager gets it right, he will be able to add significant alpha. If not, he can lose a fair bit.

Why is it that your tax saving fund has just not done as well as your two other equity funds, despite having the same fund manager?
Our DWS Tax Saving Fund uses S&P CNX 500 as the benchmark, as against NIFTY 50 which is the benchmark for our flagship DWS Alpha Equity Fund.

As you are aware, mid-cap stocks have generally underperformed large-caps in the last one year. Consequently this fund underperformed the large-cap DWS Alpha Equity fund. However, the DWS Tax Saving Fund's performance still compares favourably with other ELSS funds.

Did the RBI move not to cut rates surprise you?
No. But this is not the last of the monetary policy to come out during this environment. The current economic and inflationary environment warrants lower rates. With growth of industrial production close to zero and inflation possibly heading into deflationary zone a few months from now, it is logical to anticipate a loose monetary policy. The monetary policy should aim to inculcate some sort of investment demand. The economic conditions do not seem to be changing in a great hurry, and fiscal and monetary stimuli need time to work. So while the RBI chose not to opt for a rate cut now, that does not mean they will not do one in the near future.

So you see a rate cut happening soon?
There is more room and the need for the RBI to cut rates further. We are not at 0 per cent interest rates like some of the developed markets. Today, I would still say that the rates are restrictive. For instance, housing loan rates are at 11.5 to 12 per cent. As it is, consumers are not very confident and on the top of that, borrowing rates are somewhat prohibitive. The rates must be brought down meaningfully. I would say a 200 to 400 basis-point drop would be good, but the rates need to fall not only on housing loans, but also on industry loans.

It was not too long ago when the RBI was uncomfortable with the growth rate and the way the economy was 'overheating' and it began to tighten the monetary policy and increase rates. Are we not seeing the effect of that right now on corporate earnings?
The rate hikes by RBI till a year back were warranted by the economic conditions then. You had run-away rise in housing prices, high inflation and indeed fears of over-heating which forced RBI to hike rates.

More than the past rate hikes, what has impacted the corporate earnings is the overall demand decline and fall in commodity prices consequent to the global slowdown.

You speak of a deflationary environment. The prices of hard commodities have dropped. But not soft commodities. Recently sugar prices shot up and they have a 3.6 per cent weightage in the WPI. Cocoa prices in London soared to a 23-year high. Soyabean prices touched a new high. Corn too has inched upward. Won't this creep into inflation?

The main agricultural commodities in India are wheat and rice, and their price behaviour has not been as volatile. The farmer is in good shape in India. Last year, the government waived farm loans and gave a fresh line of credit to farmers. This year, they expect a record farm output and prices are at a decent level. I am looking at reasonably robust production of key agricultural commodities locally. So I am not too worried about inflation creeping up. The food price increase that we witnessed recently was really more caused by the transporters strike.

Why is it that the debt market has recently been much more volatile than the equity market?
I don't think that is the case. Whenever the interest rate cycle changes, the transition is quick and sudden. It's like jumping into cold water. Initially, you would probably feel a chill up your spine. But once in the water, your body quickly adjusts to the temperature. Last year when the policy change took place on the interest rate front, it took a while for the market to adjust. So at that time we saw some volatility. Between July to September 2008, we saw yields go up from 6.5-7 per cent to 9-9.5 per cent. In the subsequent months, they fell to 6.5-7 per cent again.

The first reaction was towards liquidity tightness across the globe and consequently, yields were pushed higher. This tightened money supply across all the markets. Then the RBI tried to push liquidity through by cutting rates. Once it became clear that this indeed is the way to go, we are now looking at a situation where interest rates are heading down.

Do you see the yield curve changing?
The yield curve is very steep. The 10-year yield is at around 6 per cent and 30-year yield is around 7.50 per cent. I would expect it to flatten out a little bit. As the market grows confident about liquidity being sustained as well as effectiveness of the RBI intervention, the yield curve will tend to flatten.

Is it a good time for investors to get into income funds?
Indeed. Typically, the interest rate cycle is coterminus with the economic cycle. Just as an economy does not reverse itself in a great hurry, neither do interest rate cycles. We believe that the current economic slowdown is not going to disappear in the next six months, and neither do we believe that interest rates will rise in the near future. We expect interest rates to remain modest to low for quite a while.

Do you see the FIIs coming back anytime soon?
The distress in the global financial environment is very high. Another problem is that the markets are assuming that the stimulus injected by central banks will not work. But I do not think that it is a fair assumption. The fact of the matter is that if the US government spends couple of trillion dollars, which is around 15 per cent of the annual GDP of the US, it is bound to have an impact. At this stage, the financial markets are really fighting their own distress, particularly in the hedge fund industry. A third of hedge funds have stopped redemptions because they cannot handle the outflows. Given the conditions of such an environment, one cannot expect FIIs to come back quickly.

However, when the stress in the international financial system subsides and economic conditions improve, we should expect FIIs to return, as India is likely to be relatively less affected by the global crisis.

You think the stimulus packages will work?
A year back, interest rates globally went up sharply. Liquidity became tight. Libor rates increased to 6 per cent. This sharp rise in interest rates led to a decline in asset prices, but now the reverse is taking place. An attempt is being made to bring down interest rates and to keep them low, hoping that this would revive asset prices.

Over a period of time, if liquidity stays in the market, two things are achieved. The money will either be spent on consumption or on an asset like a house or car. In both ways, the economy gets boosted. By bringing down interest rates, the government is telling the consumer to start spending. On the other hand, you as the consumer are telling the manufacturers and producers of goods to increase production.

So rescue efforts are well on, but it could be a while before we start seeing results.

Would you tell investors to buy equity in such a market?
Markets move much faster than headlines change. It is not wise to wait for the headlines to change because by then the market may already have run up ahead. If one is looking to invest in equities, in our opinion, a good time to invest may be now or over the next few months. A large number of negatives have been discounted, but what may not have been taken in by the market is that the stimulus measures will work.

Companies are meant to exist for years. If you can look beyond a few quarters, you should be buying. Invest, but with a long term view.

Growth projections have been lowered. Deflation is on the cards. Where do you see the India story headed?
India is a growth story. The capital expenditure over the last few years was fuelled by two components. One was industrial expenditure - expansion and increasing capacity. The other was infrastructure spending. Both were funded largely by the private sector. The government chose to privatise the airports, ports, roads and power companies.

In the coming years, industry capex would probably see a slowdown. I don't see fresh capacity expansion for a while. In the coming few years, where infrastructure is concerned, I think the government will have to step in and do some infrastructure spending.

Deflation is more of a statistical number. There will come a time when the numbers change into positive. We will face a tough time in the next few months, but over a period of time, India's domestic resilience, the stability of the new government and infrastructure spending will all boost the economy. We are not expecting a V-shaped recovery, but a U-shaped recovery over the coming few years.

Does the fiscal situation not scare you?
In the current situation, every single country is experiencing the effect of a synchronised global crisis; the boundaries of what we would regard as a prudent fiscal deficit is being pushed globally.

Last year, India had significant government subsidy expenditure in the oil and fertiliser sectors. With prices of crude and naphtha having declined this year, such spending should come down as well. This to some extent should counterbalance the rise in fiscal deficit due to lower tax collections and increased government spending to revive the economy.

So in that sense, I am not too alarmed by the rising deficit.