Markets with Bertie: The returns handicap is adding to FII selloff

Last week, Bertie attended a pre-budget gathering of business and market types. The overwhelming reason for attending the event was that it was being held at Fat Cats Club, which is walking distance from Bertie’s office. As the chief economist of a business house went through the long budget wish-list, Bertie was reminded of a scene from the movie Bruce Almighty starring Jim Carrey. In the movie, Bruce has been bestowed with divine powers to grant people’s wishes. An overwhelmed Bruce approves everyone’s prayers in one go with disastrous results like all sports games ending in ties and millions of people winning the lottery that ends up causing riots. For a brief moment, Bertie thought of making a meme about this but thankfully, his thoughts were interrupted by a tap on the shoulder by his old friend Mick.

Mick used to be an equity strategist who now oversees the asset allocation for a large US pension fund. “Hey Mick, good to see you in Mumbai my friend,” said Bertie. Mick smiled. “Here to send some money our way?” The salesman in Bertie was instantly at it. “Not really,” said Mick “Here on a personal trip. Folks are getting old. Taking them back with me,” he said.

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As the chief economist droned on, Bertie and Mick found a quiet table and the topic veered towards the incessant foreign selling in the equity markets. “Yes, money is flowing back to the US as the data shows,” agreed Mick “but that is not the only reason perhaps.” Bertie was all ears now. “When I translate rupee returns to dollars, there are two things I have to contend with; currency and taxes.” Bertie nodded. “On trend, the rupee depreciates about 2-3% annually against the dollar and I have to pay at least 12.5% tax on capital gains. So, if you do the math, India is handicapped by about 5% when compared to US returns, by these two factors.”

That got Bertie thinking. “But this is not new Mick,” he countered. “Yes,” he agreed, “but it becomes important when market returns are coming down. If you are making 25-30% year after year, as we did for a while, you are ok with this handicap. But when returns come to single digit, this matters.” Bertie saw the logic of this and started to wonder if it was too late to add a couple of things to the chief economist’s wish list.

The budget and a beaming Bertie

It was a working Saturday for Bertie. Our man is a creature of habit which dictates that budget speeches have to be heard in the office. As Bertie was about to step out of the house, the missus asked, “Budget today?”. He nodded. “Will make your favourite pav bhaji for dinner,” she said sweetly. Caring about what the man will eat for dinner wasn’t her daily pre-occupation nor was this meant to be a reward for working on the weekend. The missus was aware that on many budget days, Bertie had returned home in a foul mood. Either his tax rate had been bumped up or capital gains tax had been increased or tax treatment of some investment instrument had been retrospectively changed. So, she wanted to do what she could to keep the home atmosphere pleasant.

But this time around Bertie came home smiling to the aroma of pav bhaji. The missus was braced for a scowl so the smile threw her off but she was still circumspect. “Good day at work?” she asked without directly using the B word. “Super,” replied Bertie. “Tell me more,” she said. “Arre nice budget yaar!” the man said. She let herself relax a bit.

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Bertie plonked on the couch and went to tell her about fiscal consolidation, the improvement in the quality of spending, how tax cuts would raise growth, the new public debt anchor and lack of any freebies. It seemed he was making the rough draft of the internal note he would write on Sunday for his clients. But all through this monologue, the smile never left his face. The missus had been missus for long enough to know that Bertie’s cheeriness was not emanating from the disciplined path of fiscal consolidation which was now in its fifth year.

“But there is more,” she prodded. “Yeah babe! No changes to anything on the investing side and guess what, an income tax break for us.” Bertie now allowed his smile to broaden into an outright grin. Seeing her man happy, the dear girl beamed as well. Bertie may appear to be this suited finance bro speaking to media and peers in a sombre tone about primary deficits and marginal propensity to consume, but like everyone else, he cared about his personal finances much more than the country’s. The budget was good but the grin that day was for the lakh and ten thousand that madam FM had sent his way.

Bertie is a Mumbai-based fund manager whose compliance department wishes him to cough twice before speaking and then decide not to say it after all.