Sustaining Growth in Emerging Markets

ASSOCHAM hosted its Mutual Fund Summit on November 26th, in which PwC was the Knowledge Partner. PwC has authored the Theme Paper titled "Sustaining Growth in Emerging Markets".

Overview
The report encapsulates the growth phase of the Mutual fund industry, laying strong emphasis on the need for investor education and investor protection. It also captures the nuances of malpractice in trading and discusses ways in which this can be curtailed with investor confidence being boosted in the process. The section on regulations traces the changing regulatory landscape of the Mutual Fund industry, elaborating on the key regulations which facilitate investor protection.

  • Investor education is the first step towards investor protection
  • Some of the ways in which greater awareness about mutual funds is being brought includes organising investor meets, using multiple vernaculars, aided by the technology of mobile phones, use of advanced business models etc. These campaigns and programs should be designed to aid the investor in formulating his investment goal and planning to achieve it over a defined time horizon. Concepts of financial planning should be introduced and newer opportunities should be created to distribute mutual funds in the rural and semi-urban areas.
  • AMFI has reported that in the current financial year till July 2010, 24 AMCs have conducted 798 Investor Awareness Programs covering 136 cities and 29,430 participants.
  • There is an inherent need to sustain Retail investor confidence in mutual funds.Participation in the mutual fund industry remains skewed towards the corporate investors, involving low participation from the retail sector.
  • Capital markets in India, perceived as part of one of the fastest growing economies, have caught the attention of global investors. Foreign investments have poured into the country, with around $20 billion ploughed into the capital markets in the period January 2010 to November 2010.
  • Curtailing malpractices in trading, will nurture investor confidence.Characteristically, the nature of unfair trade practices is predominantly that of market manipulation, and price rigging. Some of the other irregularities may be that of insider trading, takeover violations, and violation of norms in capital issues, non-disclosures under SEBI regulations and illegal carry forwards.
  • Emerging markets represent 37% of the world’s gross domestic product, and Goldman Sachs is estimating that they will represent 49% by 2020, hence signifying steady growth in years to come. The steady stream of FII inflows are evidence to the high growth story of India, offering better returns as compared to advanced economies.
  • The year 2009 witnessed an inflow of $80 billion in emerging market funds, while simultaneously dealing with a withdrawal of $60 billion from developed economies like US, Europe and Japan.In 2010, investment into emerging market funds has aggregated $40 billion.
  • With the emerging markets painting a high growth story, there is also a note of caution, as high levels of capital inflows is leading to higher valuation of markets in Asia. Measures need to be taken to create a safeguard against these huge waves of capital flows. Monetary measures need to be put in place to curtail high inflationary conditions and credit growth. A robust macro-economic framework needs to be outlined and established to absorb the inherent shocks.

A lot of attention has been drawn to the burgeoning growth of emerging economies, where investors are looking to earn better returns leveraging the interest rate differentials and the vibrant capital markets. However, a note of caution is sounded enumerating some of the risks which may have a long term impact on the investor and the economy as a whole. Thus, the need to have regulatory control to preserve these economies and make them more resilient needs to be duly re-emphasised.