Statistics lie. The Statistician lied. The first is an often repeated adage. The second is the appalling state of governance in our country. Manipulation of data is an old trick in a government’s bag. But, the context in which such manipulation surfaces in the public domain is very important. If a data lapse surfaces when investor sentiment is ruling high, the markets will hardly notice it. But, when investor sentiment is running low and trust deficit on the governance is widening by the day, the last thing we wanted was an admission of a data lapse.
Industrial growth will certainly slow when interest rates rule high and liquidity is tight. Falling interest rates and improving liquidity will sequentially restore growth. Industrial production will return to growth mode on the back of better liquidity, lower interest rates and improved traction in sectors like services, mining and power generation. These three factors will revive industrial production.
But, the greater issue that remains to be addressed is the Indian government’s falling credibility and its contempt for the views and sentiments of the business and investing community. It looks unlikely that there will be a reversal of public opinion on the state of governance. The mutual distrust between the UPA II and the business community will only grow in the coming year.
In the financial year 2011-12, domestic mutual funds sold stocks for Rs. 40cr. Over the year, the BSE sensex fell by 11% from 19,420 on April 1, 2011 to 17,404 on March 31 2012. Investors have sold out on every rise giving a thumbs down to equity. With the exception of a few leading mutual funds, all fund houses are seeing outflows from equity schemes. Our research of fund schemes leaves us puzzled. We feel that prevalent valuations do not merit active selling. Domestic investors are actually in selling mode when they should be buying equities.
The mutual funds industry’s excessive reliance on distribution is widely believed to be the cause for the investor apathy towards equity. The lack of a Sales and marketing engine can’t be reason enough for investors to shun an asset class. There needs to be a stronger and deeper reason. The mutual funds industry needs to find that reason and address the fears of the investment community through affirmative actions. Waiting for the Government to revive the old sales mechanism of upfront commissions or creating a policy environment conducive to the stock markets is hardly an affirmative action.
The investor needs to invest more monies into equities now and there are some extremely strong reasons to do so. Valuations are reasonable; we have already had five bad years for equity; other asset classes are close to their peaks; investors are extremely under-owned in equities. The industry needs to convince the investor on these basics. The investor needs to revisit his investment beliefs.