May 18, 2010
Dear Friend,
 Fly across the world today and open any financial daily and you will see few words staring at you; Banking crisis, Fiscal stimulus and Regulations.
The last 15 years experienced a sudden increase of world macro imbalances. This coupled with the development in the financial markets since the early 1980s were the primary causes for the financial crisis in 2008. In the last decade, oil exporting countries, China, Japan and few other East Asian developing nations have accumulated large current account surpluses. On the other hand, large current account deficits have piled up in the USA, UK, Ireland, Spain and some other European countries. A key driver of those imbalances has been very high savings rates in excess of domestic investments in countries like China. These savings have funneled into Treasuries of USA and other countries raising claims on the rest of the world.
This in turn has driven a reduction in real risk free rates of interest to historically low levels in 1990 in USA and UK leading to rapid growth of credit expansion particularly in the US and the UK. With the falling interest rates, institutional investors craved for yield. This lead to the growth of very innovative and exotic financial products increasing leverage of major financial institutions - in particular investment banks; ultimately fuelling banking crisis.
Fiscal stimulus of billions of dollars by the governments to stave off any contagion as seen in USA in 2008 and now recently in Europe is fallout of the bank crises. But, the key to fend off future crisis is getting budgetary deficits and debt under control. Austerity measures will, in the short run contract economies affecting markets.
In his article in Newsweek in December 2009, Niall Ferguson, professor of History at Harvard and author of the book The Ascent of Money wrote "the government debt rises by 86 percent during the three years following a banking crisis. In the wake of these debt explosions, one of two things can happen: either a default, or a bout of high inflation that catches the creditors out. The history of all the great European empires is replete with such episodes. Indeed serial default and high inflation have tended to be the surest symptoms of imperial decline". Ferguson also explains in a very logical manner how without radical fiscal reforms even the largest economies of the world could be in the danger of falling into acute crisis. The recent example of PIIGS economies corroborates his findings.
Remember the Great Depression of 1929. The Financial markets got caught in a wave of regulations for almost two decades post the crisis. The Glass-Steagall Act that introduced the separation of bank types according to their business, i.e., commercial and investment banking lead to the Banking Act of 1933. It took over six decades to repeal the Glass-Steagall in 1999.
It is clear that radical changes are needed in financial sector regulation, not just at USA or European level but right across the globe. The asset management industry is diverse and its role in the crisis is not straightforward. Certainly all parts of the sector have been massively impacted by the crisis, with very substantial declines in funds under management. Consumers worldwide fled out of equity funds to safer money market funds and other investments believed to be relatively secure against a backdrop of profound anxiety about the soundness of major banking institutions. Parts of the asset management industry - Money market funds @@ and Hedge funds, have been singled out by some commentators as an underlying cause or perhaps a contributing factor to the current crisis.
@@ A G30 report recommends that "money market funds which want to continue to offer bank-like services_ and assurances" should be reorganised as special purpose banks and regulated as such.
It is worthwhile to note that a key factor contributing to mutual funds' success has been regulation under the federal securities laws administered by the Securities and Exchange Commission (SEC). Securities regulation has proven to be extremely successful in protecting fund shareholders while permitting fund managers to innovate. Securities regulation stands in sharp contrast to bank regulation. Bank regulation is centered on assuring the safety and soundness of banks rather than protecting bank customers.
It is in this context that we should revisit the regulatory changes initiated by Securities & Exchange Board of India (SEBI) in the last several months. SEBI has taken several steps with the sole objective of protecting the interest of the investors. The industry is in constant dialogue with the regulators to institutionalize the radical changes in commission payouts, disclosures to investors and redefining the role of the Advisor. The same concept of investor protection by way of greater disclosures and rationalization of costs is now spreading to the insurance industry. This is a healthy trend. Indian markets will continue to show a strong growth in GDP for the next two decades. Wealth creation across the various strata of the economy will propel this country amongst the top 5 countries in the world. The role of investment managers to provide investment solutions for a large population of this country will result in a explosive growth in the fund management industry.
In the last decade, the Asset Management industry in India that is dominated by mutual funds has been at the forefront of establishing robust operating models, strong risk management processes and high levels of transparency. It has been quick to adapt and embrace best practices. Little wonder that the industry has witnessed over 35% compounded growth since last 10 years. In light of the changes in the global financial markets following the financial crisis, the Asset Management industry in India has an additional responsibility to win back the trust of the investors.
AXA Investment Managers, Sponsor of Bharti AXA Mutual Fund, is committed to building a solid business in India on the pillars of strong governance, talented staff and disciplined processes. It will strive to not only to offer superior products across all asset classes but also instill confidence among the investors through risk mitigation and greater disclosures.
To those who have already invested with us, I would like to thank you for reposing your faith in us and to those who wish to know more about us, please feel free to call us at your convenience.
Sincerely,
Sandeep Dasgupta
CEO, Bharti AXA Investment Managers |
