When a czar of the Indian financial system meets a Nobel laureate whose knowledge of the global financial market is extensive, it is truly a convergence of great minds.
In a special annual dialogue powered by the National Stock Exchange (NSE) on 3rd Nov, commemorating the contribution of the National Stock Exchange’s founder Dr. R H Patil, India’s leading banker Uday Kotak, MD & CEO, Kotak Mahindra Bank, exchanged notes with Prof. Eugene Fama, 2013 Nobel laureate in economic sciences who is also widely acclaimed as the `father of modern finance.’
The annual dialogue features thought leaders of the highest caliber and reputation as a fitting tribute to the memory of NSE’s Founding Managing Director Dr R. H. Patil, who was one of the tallest leaders and institutional builders of the Indian Financial Services industry.
Prof. Fama’s empirical work
Prof. Eugene Fama, best known for his empirical work on portfolio theory, asset pricing, and the efficient-market hypothesis, is currently Robert R. McCormick Distinguished Service Professor of Finance at The University of Chicago Booth School of Business.
Taking an overview, Uday Kotak, wanted to know whether index funds were better for investors than discretionary portfolio management because efficient markets offer better outcomes? According to Prof. Fama, such outcomes are not just better but cheaper as well. "In my experience, prices adjust to information. But you need more active and informed investor to keep the market efficient,” he averred.
India’s leading banker
Kotak, whose Kotak Mahindra Finance Ltd. became India’s first company to receive a banking license from the RBI in 2003, said that more Indians are putting their money in discretionary mutual funds. Would Prof. Fama’s advice be different? According to the leading academic, it was much the same situation in the US. "When I first started to look at the passive assets, it took 30 years for it to go from zero to 20% passive. And now it is up to 50% passive.”
In response to Kotak’s question as to what happens to the stocks outside the index if everyone goes passive, Prof. Fama replied that active people will move there, while the passive will come along to start smaller stock funds.
Kotak also asked if increased technology and information dissemination in today’s markets is making it more efficient. "In principle, it should make it more efficient. The problem is you can never tell. Stock movement is so volatile that it is difficult to detect small improvements in pricing efficiencies,” Prof. Fama said.
No clarity on high frequency trading
The Nobel laureate believes that no one can quite say whether high frequency trading makes the market efficient. "There is not just enough empirical evidence,” he concluded.
On the changes in the post-Covid financial world, Prof. Fama said he would prefer to wait and watch.
The ESG factor
On Uday Kotak’s crucial question whether environmental, social and corporate governance (ESG) will change investor preferences for sustainable technologies, Prof. Fama’s candid reply was that it would depend upon whether people are willing to pay more for products produced in an environmentally friendly way.
Prof. Fama disagreed with the notion of stock bubbles. "People don’t see the bubbles coming. They just see them going. Which means they are not really bubbles. It just means that they are up and downs of markets,” he explained.
Emerging markets like India
For emerging markets like India, the financial whiz believes good available information is important. ``How information gets out in the public so that it does not advantage insiders is the key. In addition, volatility in emerging markets is really high,” Prof. Fama points out.
Delivering his inaugural address, Vikram Limaye, MD and CEO, NSE, said that NSE under the leadership of Dr. Patil, had many firsts including a role in setting up the first depository and the first clearing corporation. NSE in a short span of time has emerged not only as the largest exchange in India but also one amongst the top 3 exchanges in the world. NSE is also the largest derivatives exchange in the world in terms of contracts trading.
Limaye also pointed out that in order to achieve sustainable economic growth, it is critical to expedite market development and capital formation and also access to capital for SME’s.
“We have come a long way over the last 2 decades in evolution of markets and economic growth. As the country powers itself forwards to become self-reliant, we need to recommit ourselves to creating the right environment and institutional architecture that is conducive for long term growth and development”, said Vikram Limaye.
Watch the video here: Dr. R. H. Patil Memorial Dialogue 2020
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