Lost in the crowd

The small investor seems forgotten in the rush to please the small saver, the small borrower and the small entrepreneur

By Mohan Sule

The small man is drawing disproportionate attention of late. Ambitious programs have been formulated to woo the marginalised citizen. The zero-balance scheme has the icing of overdraft facility besides being the receptacle for cash to buy subsidised consumption items.  Life and accident insurance cover can be had by paying a nominal premium. The unorganized sector now has been offered the security of pension. The promise of universal housing by the time India turns 75 years is primarily aimed at those outside the mainstream. Electricity for all, to be a reality by 2019, is an important cog in the infrastructure maze besides road linkage that will aid urbanisation and draw attendant benefits.  A complex financial engineering exercise will excise the huge debt of state electricity boards to remove last-mile obstacles. Telecom companies have been asked to shape up so that connectivity remains clog-free. A roadmap has been laid out by the central bank for pass-through of interest rate cuts. If the small saver and the small borrower are sought to be protected, the small entrepreneur, too, is at the centrepiece of policy directives. Niche Mudra is refinancing loans to daily wage earners. Ease of doing business has become the new anthem. Transparency and stability in taxation are the conjoined twins on display. There is promise of eschewing retrospective changes. Harried bosses bogged down with inventories, excess capacity and slump in demand are soothed by talk of dethroning the adverse tax regime and lowering tax rates in lieu of exemptions. Permits to start business are being shaves or bunched under a single window.

Lost in translation of big ideas for the common man is the small investor. To be sure, the Securities and Exchange Board of India has been periodically updating and introducing guidelines to make the trading environment attractive and safe for the ordinary investor.  There is insistence on disclosures and transparency. The regulator has also been fairly active in banning companies from capital markets for sins of omission and commission. The new Companies Act has revised accounting norms and third-party transactions. The idea is that all price-sensitive information is in the public domain. Yet, investors, particularly the minority, continue to remain wary of companies, government and the regulator. The dominant feeling is that the big fish invariably get away. The dithering over the merger of scam-ridden NSEL with healthy parent FTIL has been exasperating. It is possible for investors to spot danger signals from financial numbers and qualitative information. The woes of Kingfisher airlines were not secret. The problems of capital-intensive companies such as engineering, procurement and construction players, miners or telecom services providers are widely discussed. Costly mergers and acquisitions have proved to be the Waterloo of many leaders.

Yet many events unfold unexpectedly. The depreciation of the Chinese currency created havoc in the emerging markets: importers and exporters to the giant economy. Hardly any one forecast the devaluation of the yuan twice over. Companies worldwide have the tendency to go belly up without warning. Overnight, Satyam Computer Services, among the top four tech companies in India, went bust after the promoter admitted to cooking the books. Enron and many other emerging companies and hedge funds, too, have collapsed without much ado.  How can minority investors’ interest be safeguarded in such instances? The bankruptcy bill pending in parliament will end the prolonged period of grief of the small shareholders as sick companies make the round of banks and the Board for Industrial and Financial Reconstruction. That’s about all as creditors will continue to have the first right on the proceeds from the sale of assets. The holding period to qualify for long-term capital gains was reduced to one year for equity to encourage retail participation but is three years for debt schemes. Probably the architects of the provision mistakenly believed that debt funds carry less risk and changes in interest rates come after long intervals and are secular. The agony of fixed-income investors as they waited for the US Federal Reserve to make up its mind is fresh. The stir created by the holding of paper of an auto ancillary maker that was downgraded has brought the focus on the dangers posed by competitive debt funds eager to offer market-beating returns. With global economies in a flux and different geographies taking varying views on interest rates, the volatility in markets hitherto considered staid and steady is bound to increase. The time has come to bring all investment instruments on par in their treatment of lock-in and tax rate.

A new era

Globalization means the age of prolonged bull and bear runs is nearly over as different markets cope with unique challenges

By  Mohan Sule

Investors fear volatility. It makes them risk-averse. Many prefer to stay on the sidelines till the market calms down. It is drilled into their psyche that the patch of turbulence is temporary. Contributing factors ranging from political instability, disturbances, liquidity crunch to weather fluctuations are enumerated. Indeed some of the causes are of short duration and are resolved rapidly. A few might have the tendency to fester indefinitely or erupt frequently. The unpredictable scenario puts off a large chunk of investors from equities. Some tiptoe occasionally to test the waters and scurry back to the safety of fixed income instruments on getting burned. Most keep waiting for the market to stabilize to form an opinion. Of late, however, there is a reckoning that the turmoil is likely to be a recurring feature rather than once-in-a-while phenomenon. The inter-linking of markets has magnified the impact of developments in some corner of the globe on trading worldwide. Mapping of scheduled events for their ramifications on investment pattern is turning to be an academic exercise rather than an attempt to maximize profit or restrict losses. A recent illustration of the diminishing returns of projections was the anticipation of market movements on the expected hike in US Federal Reserve’s discount rate. Contrary to the general belief, markets rose rather than nosedive after the central bank increased rates 0.25% after more than a decade. Those who withdrew or held back expecting more correction were disappointed.

If a predictable occurrence led to so much hand-wringing, then the continuing suspense over the course of direction of the market might break down traditional methods of making investment decisions. Stability in policies, taxation and laws are attractive pivots for investors. The after-effects of the havoc created in the market a few years ago when then Union Finance Minister Pranab Mukherjee levied retrospective capital gains tax on overseas transactions of assets in India are still recalled and felt. Companies consistent in their dividend payouts are preferred.The importance can be gauged by the recent directive of the market regulator to issuers to disclose their dividend policies. Those utilizing funds for purpose other than stated in the prospectus have to offer exit option to investors. So far it was understood that exporters’ fortunes are tied to the health of the importing countries. Now there is a reckoning that even executive actions can have a bearing. Shares of tech companies took a hit when the US government announced hike in H-1B visa fees from 2016. On the other side, the export tax slapped by the Indonesian government on coal blunted to some extend the cost-effectiveness of importing the commodity to tide over local shortage. The restrictions imposed by the Supreme Court and the Delhi government on vehicular movement in the capital hurt shares of makers of big vehicles.

The biggest puzzle is why plunging commodity prices are not lifting economies of the emerging markets. India’s growth seems to have flattened and that of China’s slowed down. The slump in demand for oil and metals has resulted in supply glut, keeping prices down and, in turn, pulling down the economies of the producers. Investment in shale gas, a shining star till recently, has proved to be non-starter. The irony is that most of the emerging markets look at the commodity producers as important markets for their goods and services. The Gulf is a major source of remittances and buyer of Indian merchandise and projects. The global economy, therefore, seems to be trapped in a vicious cycle. Countries exporting natural resources want consumption to increase to stay buoyant. The increase in appetite of the users is supported by debt and leads to asset bubbles and eventually a bust. Thus, the calculation of investors hoping for oil-based industries getting a boost has gone off the mark. Similarly, some of the blue chips from legacy conglomerates have underperformed as they have had to commit significant resources to succeed in the auctions for natural resources, leaving them cash-strapped to undertake capital expenditure. Those basing their investment calls on longevity of an enterprise as well as enthusiastically backing emerging sectors that have proved to be capital guzzlers might have had to cut their losses. Not surprisingly, bets on entities based on their geographical presence are proving to be costly after the emergence of low-asset model e-commerce start-ups. The sudden transformation in the outlook of different regions is turning equities choppy. Investors will have to brace for the market to change moods often and unexpectedly. The solace will be the ease of entry and exit for those with opposing views.