The signalling at the Federal Reserve of the US meeting last week that no more interest rate hikes should be expected during 2019 has ramifications across the globe given the scale of the US economy and the importance of Federal Reserve policy to global investments. From the perspective of the Indian investment community, there are some crucial takeaways and the reiteration of a few existing trends.
First, given that global G-10 bond markets have seen a structural bull trend over the last three decades with interest rates moving lower, from a portfolio allocation perspective, the low long-term bond yields in the developed economies will create significant pressure on investment portfolios for investment return generation.
Hence, the need to look for alternative mechanisms to boost returns will be even greater post the Federal Reserve meeting last week. This search for higher yield from developed market portfolios provides an avenue for emerging markets such as India to attract some of the capital that sits with developed market investors. Relatively dovish central bank policy like the one suggested by the Federal Reserve last week further adds impetus to the trend.
The second and the biggest takeaway from the signals provided by the Federal Reserve is that the trends such as the availability of large amounts of capital for investment and the move from institutional investors towards more direct investments are here to stay. As developed economy based investors look towards emerging markets to generate investment returns, India by the sheer size of its market, is a destination for the return-seeking capital.
It is true that while large institutional capital allocations from the pension and the insurance industry do consider the absolute level of interest rates, it is as much true that a lot of the significant portfolio allocation decisions are either long-term or structural given the large portfolio sizes.
Therefore, lower long-end yields in the developed markets provide India with an opportunity to attract long-dated structural funding for mission-critical businesses and infrastructure. The structural nature of portfolio allocations implies that if attractive investment opportunities are found in India, then the capital being invested does not necessarily face the risk of “capital-flight” even if interest rates were to move significantly higher in the developed economies in the years to come. Essentially, greater focus towards attracting investment inflows into India which flow into the Indian economy due to structural low-interest rate regimes allows India the leeway to attract “higher-quality” capital that is focused on long-term returns.
The single most significant focus for long-term capital in India must be on the unlisted market and unlisted assets. The greatest challenge for both investors and the government, for obvious reasons, has been directing capital into the unlisted space. In the past, lack of transparency, an opaque pricing mechanisms and regulatory hurdles have all been issues. However, with market instruments such as Infrastructure Investment Trust (InvIT) type of vehicles that help bridge the gap between unlisted assets and a liquidity provision platform, we are taking steps in the right direction.
Structural changes sweeping across the asset management industry globally such as the recent decision by the California Public Employees’ Retirement System (CalPERS) to approve two internal private equity organisations is vital for India. CalPERS decision has two significant ramifications.
Firstly, fee structures across the alternative asset management industry are being questioned as investment returns have experienced downward pressure. The pressure to generate higher yields in the face of higher asset management fees also implies a search for greater-yield. A growing market such as India is an obvious investment destination for such funds. Secondly, an institution such as CalPERS with $354 billion under management will need large economies with a relatively high threshold of minimum deal size to operate in.
As mentioned earlier, India, given the size of the economy, provides the right opportunities in the right quantities.
In summary, structural changes sweeping through the world in terms of demographic trends, under-funded pensions funds and lower-interest-rate regimes are an opportunity for economies such as India to partner with capital providers to help boost growth.
Signalling by central banks, such as the Federal Reserve, are a timely reminder that the opportunities still exist, and a renewed focus is the need of the hour.
(The views expressed are personal. Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. He is reachable at firstname.lastname@example.org or @Taponeel on Twitter)