Reduced risk appetite is leading to a structural shift in markets: Sanjiv Shah

Interview with Co-CEO, Goldman Sachs Asset Management (India)

Despite the worrying economic condition, India is still growing at a decent rate compared with other economies, says Sanjiv Shah, co-chief executive officer, Goldman Sachs Asset Management (India), in an interview with Puneet Wadhwa. There has been a rise in the assets of India-dedicated offshore exchange traded funds (ETFs) and foreign investors are well aware of the political situation here, he adds. Edited excerpts:

What is your assessment of how things have panned out for global markets, including India, over the past few months?
There is still a lot of uncertainty in the global markets and the markets are still reflecting that. Since I manage ETFs, which are passive in nature, it will be difficult to take a call on the market trends. Having said that, what we advise clients is to be disciplined in their approach and focus on asset allocation depending on their individual needs.

How do you view the risk-aversion levels among investors? Do you see this changing anytime soon?
It appears that both international and domestic investors’ risk appetite has declined in the last few years due to the financial crisis, and this is leading to a structural shift in the markets. With risks and opportunities surfacing in different places, there is now a powerful case for investors having more flexible, more opportunistic investment strategies.

In the Indian context, what do you make of revival in the foreign institutional investor (FII) flows since July, including the ETF route? What, according to you, is still keeping them interested despite the macro-economic headwinds?
Despite concerns about growth, inflation and high fiscal deficit, India is still growing at a decent rate, compared to other economies in the world. India still has many positives such as a large economy, strong demographics, vibrant public and private sectors with a well-functioning democracy.

There have been a few concerns like the General Anti-Avoidance Rules (GAAR), but the government is addressing them. The offshore ETF flows continue to be vibrant, and in the last one month itself, there has been a five per cent increase in assets of India-dedicated offshore ETFs. This, I believe, could be getting deployed to the top index stocks.

Do you think the flows from overseas investors could dwindle, going ahead, given the political scenario in India since they will consider political stability as one of the factors while parking funds?
Well, the funds are coming in right now and they know the situation as it stands today. So, I presume they would put all this into account while investing when they know what’s going on. We see this as a positive sign rather than a negative. We see this as a continuing trend, as more offshore investors use ETFs to access various asset classes.

Mutual funds (MFs), mostly have preferred to invest in debt rather than equities since the past few months, data shows. Why? Is there a lack of conviction about how the equity markets may pan out?
I think this is more a function of investor sentiment during the last few quarters. With interest rates still ruling high, investors currently prefer debt to equity.

Talking about macros, how much importance are you giving to the patchy rainfall and other key economic indicators, including the revised growth forecasts? Have you revised your estimates too?
We believe pro-active policy steps by the government could help minimise the impact of a weak monsoon on the economy. However, we will have to wait and see for the actual impact.

Since you manage ETFs, can you tell us how big this market in India is and the reasons for its growth?
Index and ETF products are in the nascent stages of development in India, which is one of the key growth markets for these products. Whilst relatively small, the Indian ETF market has grown significantly over the last few years, and we believe that this share of passive and ETF products in India will increase significantly following the pattern in developed markets.

One key advantage India has is the footprint of the exchanges across the country. Given the high correlation between certain assets and the need for most investors to allocate assets in an efficient manner, we believe this trend will continue as more investors can now see the benefits of investing in ETFs. Simplicity, transparency and fairness of the ETF structure are important factors driving its growth.

The government is planning to use this route for divestment in select public sector companies. How successful has been this route globally and will it work in India?
The ETF route has been successfully used by governments globally for disinvestment and it offers investors diversification as well as reduces their investment risk. The Hong Kong Tracker Fund raised $4.3 billion, the largest fund offering in 1999 following the Asian financial crisis despite being the first-of-its kind for Hong Kong. The ETF structure allows a government to disinvest as and when there is demand. When there is no demand, no supply will be offered. This removes the threat of overhang. The ETF structure with its simplicity and transparency also allows active participation by retail investors.