Daily Voice | This CIO predicts spurt in developmental work ahead of the general elections

Vineet Bagri of Athena Investments

As the election year gets near, development works have accelerated, and as we get closer to the date, more announcements will be made by the central and state governments, which could also indicate their agenda for the next five years, Vineet Bagri, CEO and CIO of Athena Investments, the part of Trust Group, says in an interview to Moneycontrol.

China is coming out of a Covid-induced consumption slowdown for three years. "We expect China to post solid growth in the coming quarters, as well as its spill-over effect on the world economy to be positive," the professional with 23 years of experience in the financial industry across banks, NBFCs, and advisory.

On the corporate earnings announced so far, he feels there seems to be a slowdown across the board, and managements are not as gung-ho as they were in the last year.

Are we at the peak of policy tightening cycle globally? Do you really feel the rate hike beyond 6.5 percent will dampen the economic growth?

The data is surprisingly resilient for the current (elevated) interest rates in developed markets, especially the US. This makes one wonder if we are truly at the peak of the tightening cycle globally. There is the lingering fear of inflation coming back after a pause which has central bankers worry. Chances are that central bankers will not stop raising till such time that they see stagnation or even a modest decline in real wages and employment. This remains data dependant and at this point it could go both ways.

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Vineet Bagri

Chief Executive Officer and CIO|Athena Investments

Needless to say, the current global set up is largely dependant on borrowings for consumption and growth, in both developed and emerging markets. A prolonged period of interest rates beyond even 5 percent will dampen prospects.

Do you think the rate hike concerns are already discounted by the market? What could be next trigger for the market?

The rate hike concerns keep coming and going over the last few quarters. It seems that the market has made up its mind that rates have peaked, whereas the Fed is particularly insistent that their mandate to control inflation is paramount. It’s like a tug of war where the Fed is playing the role of a moderator to the mood of the markets.

In our mind there are still several challenges on the horizon. The Ukraine war is still continuing. Supply chain issues are not yet resolved, albeit they have eased. Geopolitical issues are becoming shriller. Climate change and natural disasters have become more punishing, like the unfortunate and disastrous earthquake in Türkiye and Syria. These are some of the negatives in the market today.

On the other hand, China has opened up after almost 3 years of Covid, and that tsunami of demand is expected to hit world supply - which will definitely create both opportunities and inflation. So, we think that these will be interesting times in the markets.

Even after Budget, do you expect more announcement from the central government ahead of the general elections next year?

Over the last few years, we have seen the government make several notable off-budget-cycle announcements, most notably reducing corporate income taxes to 25 percent in 2019.

Since we are in an election year, we expect development works to be speeded up, and as we get closer to the date, more announcements will be made by central and state governments, which could also indicate their agenda for the next five years.

Do you think the Chinese economy to report strong growth in coming months?

China is coming out of a Covid induced consumption slowdown for three years. There is no doubt that consumption in China will increase dramatically in the coming months. Similar patterns have been seen across the world when Covid induced restrictions were ended. We expect China to post solid growth in the coming quarters, as well as its spill over effect on the world economy to be positive.

Any thoughts on corporate earnings announced so far and management commentaries?

There seems to be a slowdown across the board. Managements are not as gung-ho as they were in the last year. Discretionary consumption seems to have taken a significant knock. At this point it is not clear if that is a base effect issue due to the elevated base in 2021-22 (post Covid demand) or a general slowdown.

Sebi is all set to make AIFs more investor friendly. Your thoughts?

This is a welcome step from SEBI. Over the years the regulator has considerably improved and refined the regulations related to AIFs. The proposed changes, like direct scheme, restrictions on upfront commissions to prevent mis-selling, units in demat forms etc., are all steps in the right direction.

What is the major difference between AIF and MF or portfolio management? Do you think the AIF industry is the fastest-growing investment forum in India when compared with the traditional mutual fund or portfolio management serviced (PMS) industry?

The regulator framework for asset management in India is very well evolved and articulated. There are three distinctive forms in which asset management services can be offered.

1. Mutual funds are a pooled vehicle where the minimum investment amount is just Rs 1,000. This vehicle is the most regulated, as this is where retail investors also invest their savings. This instrument is designed for long term investments, and the return is taxed in the hands of the investor. Mutual Funds are not permitted to leverage their investments. Investment categories are prescribed and managers are not permitted to deviate from these categories (eg. large cap funds cannot invest into small cap stocks beyond a certain percentage). Within prescribed limits, mutual funds can also invest overseas. The fees that an investment manager can charge are regulated to make it cheaper for the retail investor. This is the main chunk of the AMC industry in India and globally.

2. Portfolio Management Schemes (PMS) are essentially separately managed accounts. They differ from mutual funds in so much as each individual investors’ portfolio is managed separately. These portfolios can have any combination of debt, listed equity or unlisted equity, subject to the limits that are laid out. Returns from each instrument are taxed separately in the hands of the investor, i.e. debt instruments are subject to debt taxes, equity instruments are subject to equity taxes and so on. PMS are also not allowed to leverage their investments. The minimum for PMS is now at Rs 50 lakh. It is designed for investors who want personalised investment management.

3. Alternative Investment Funds (AIFs) are essentially that category of investments which allow the investor to participate in private equity type deals, special situations, high yield or hybrid debt, an assortment of different listed equity strategies which may also include leverage etc. Category-III AIFs are allowed to leverage their investment up to 2 times of their corpus. The regulations permit the investment manager to express their view and style in a structured manner. The minimum for investment in AIFs depends on the category, and the maximum is reserved for Category III AIF, which is Rs 1 Crore for a single investor. This type of investment is intended for accredited investors, or investors who have the knowledge and experience of investing in market instruments. Income taxation is levied at the scheme level, and the returns are paid out to the investor on a post tax basis. There is no restriction on the fees that a manager can charge, and it is common to see performance based fee schedules in this segment.

We believe that the entire asset management industry in India will grow at a healthy pace in the next decade, driven by wealth creation and the improvement in per capita GDP of the country. Within this, it is possible that AIFs could grow at a faster pace given the increase of accredited investors due to the improvement in financial literacy in the country.

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