CFA Charter Award Ceremony & Felicitation and Equity Markets Outlook

Contributed by: Bhrigu Shree, Hareesh Mothi, and Abhimanyu J L

The Bangalore Chapter of the Indian Association of Investment Professionals (IAIP) held its annual felicitation ceremony on the 14^th of December 2013. We were honored to have among us Jayesh Gandhi, President of IAIP and Executive Director at Morgan Stanley Asset Management in India to preside over the occasion. The event was organized to recognize our new members and candidates who have completed all the 3 levels of the CFA program, pending charter.

Jayesh shared his perspective on the importance of a charter and how it has helped him tremendously in his career. He shared a few challenges and triumphs faced during his career and encouraged candidates and charter holders to utilize the society for the progression of their own. Jayesh acknowledged that all candidates and members have gone through sacrifices in the process of becoming a CFA charterholder  and therefore he understands how challenging the process could be. It was also an opportunity for family members along with the candidates to recognize and appreciate the work done to attain the highest level of professional excellence and to be proud of their daughters, sons and spouses.

As the event progressed, family members, new members and candidates were invited to share their success stories at the forum. There was a palpable level of comfort felt amongst the attendees as stories of challenges, sacrifices and triumph were recognized, related to and appreciated. The event was followed by felicitating 7 new Charterholders and 24 candidates who had completed all 3 levels in Bangalore.

The audience was further treated to a fascinating presentation by Jayesh on Equity Markets, a summary follows below:

Historical Context:

The BSE Sensex on February 11^th 2000 made an all-time high of 6006 and retreated back to around 3000 levels until 2003 and then made further highs until 2008 when it hit a high in excess of 20,000. Over the last few years the Sensex had retreated to around the 17000 mark until the recent all-time high of 21483 on Dec 9^th 2013.

Jayesh through his experience, knowledge and comprehensive understanding of the equity markets demonstrated how a long-term perspective and commitment to equities as an asset class had created tremendous wealth in our country. He further showed how not being invested in the market, even for a short time and trying to time the market may not always lead to positive results.

He articulated through various examples from the past and across various equity markets how wealth was created in equities over the long-term. All information was grounded in research and allowed the audience to revisit the lessons from CFA study material and relate it to real world phenomena’s.

A Summary:

Equity as an asset class is relevant to almost all portfolios. Returns on asset classes move in phases- for example, debt was the best performing asset class between 1994 and 2000, equities between 2003 and 2008, and gold over the last 5 years. Comparatively, equity has returned only about 3.50 percent over last 5 years, whereas inflation during the same period has been at around 7.0-8.0 percent. So, the question arises: why is equity relevant today?

The answer lies in a broader historical context:

• To begin with, we need to look at the return during the last 15 years which is around 15.0 percent. This return is comparatively higher than most other asset classes. Hence, despite low returns over the last 5 years, equities still may provide significant returns over the long term and given this context, this specific asset class cannot be ignored.

 Also, according to a study conducted by Morgan Stanley Research on the post crisis behavior shown by 19 equity markets, it generally takes between 7 and 9 years to recovery and consolidate markets and to return to a higher growth rate following a financial crisis. 

Finally, Jayesh opined that for investors to make money, the equity market needs to raise above its previous highs. Given this context, the critical question would be when can one expect a break-out in the markets? Juxtaposing this model next to the equity market behavior in India, It can be observed that we are now in 6^th year of the recovery phase i.e., the second phase of the cycle.

The second phase of recovery seems to be better than first. The reduction in volatility over the course of the last year substantiates this observation. Hence, it is reasonable to predict that the recovery cycle could end in the next 2 years and that markets will grow from there.

Further, Jayesh talked about what is changing at the margin. He considered the following key factors under observation:

• Interest Rates and inflation
• Global Commodity Prices
• Gold
• Global Financial Conditions
• Domestic Politics
• Currency

He noted that at present, except for interest rates and inflation, all other key factors are either neutral or positive. The situation a year ago was not as positive as today with half of them were negative. This further substantiates our conclusion earlier.

Jayesh also brought forth a couple of important factors that may have an impact on whether equity as an asset class will be favorable or not into the future:

• Change in Leadership: Recent history shows that emerging markets with a decisive change in leadership have seen outperformance in the subsequent 12 months. A decisive change of leadership in India may trigger the same.
• Corporate Earnings Trajectory: A fundamental thing that determines returns in the equity market is corporate earnings. Greater corporate earnings translate into rising stock prices, which in turns results in higher returns. Corporate profits are expected to increase going forward.

 Jayesh also restated something that CFA study suggests: The key in market is asset allocation and diversification. He also advised that time in market is more important than timing the markets. It makes a big difference even if one misses a small patch of the best performing days. For example, missing just 40 days in the recent years would decrease returns from 16.4% to 10.8%.

 A Summary:

 So in answering three question from the historical context section: Why this recent exuberance? What has changed? And, where are we heading? – Jayesh noted that the current exuberance was an indicator of the markets expectation of a change in governance at the center after the recent state election results. Factors under observation are positive or neutral except for inflation and interest rates and have improved relative to previous years. The discussed model predicts a turnaround in the near future and the second phase of recovery seems more promising.

 Through observation, insight, and a well-articulated argument, Jayesh made a case for staying invested in equities and expected higher returns in equities into the future. He was optimistic of a turn-around in equities and advised the gathering to not despair over returns from the immediate past.

 In summary, not only did the event entail a celebration of achievement and sharing of wisdom on career progression, but also provided guidance on what to expect over the next few months. Jayesh’s advice on stay connected and stay invested were well received by the audience. The event concluded with an enthusiastic networking session over lunch.