Wednesday, March 10, 2010

How about this ...

... as a measure to partly counter the volatility that Indian and other emerging/developing equity markets can now expect for the foreseeable future?

In India for example, the average trading day sees international institutions trade two to three times the value of shares domestic institutions do (in many cases its the same parent fund manager e.g. BlackRock, Fidelity, Templeton, except that the domestic institutions raise Rupee denominated funds from local investors). Any changes in international interest rates, currencies, sentiment, developments in other emerging markets etc. therefore lead to a disproportionate impact on the local market, making equities a less attractive investment and fund raising more difficult for Indian companies. I for one would like to see the foreign to domestic value traded ratio reverse with local institutions accounting for a majority of market activity. Not by reducing the international investment in the local market but by increasing the funds managed by domestic institutions.

Market volatility doesn't help mutual funds raise money though, nor does the significant Government disinvestment programme now under way.

My suggestion therefore is to encourage and offer tax and other incentives to fund houses to raise Rupee denominated funds from international investors - an untapped market thus far. This money should remain invested for the a longer term. My reasoning is simple - I believe that retail investors will redeem an investment in a fund less readily than a professional fund manager would sell a stock or reduce an allocation to a market. An added attraction for investors would be that over time currencies such as the Rupee are expected to appreciate against the Dollar, Euro, Sterling etc.

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