Outlook Business: So, what kind of return do you foresee from equities in the next year?
Yatin Shah:I think the index will go up more than 15%.
Outlook Business: And worst-case?
Vishal Kapoor: You could see more volatility over the next quarter. Hopefully, in the early part of next year, things will get clearer. The Fed tightening should be behind us. What I am hoping to see is a bit more earnings growth in the next quarter. A lot of the frontloading of government spending and its impact on the economy will hopefully play out. On the fixed income space, one can expect 8% capital appreciation, as we expect another 50 bps cut over the next calendar year.
Rajesh Saluja: Worst-case scenario is 10% and my base case would be 15% return in equities. Real estate, on the debt side, would be 15-17% and 20-22% on the equity side. Fixed income would be 8-10%.
Atul Singh: At last year’s roundtable, I think everybody had much loftier year-end targets. Somebody said 40,000. Now, that euphoria has ended and we are back to a normal market. Return in a normal market in India is closer to 15%. Fixed income is also looking healthy. It could be 10-11% with a rate cut.
Outlook Business: With a good part of the rate cut already behind us, is fixed income still in favour?
Atinkumar Saha: In the last one year, 150 bps of rally has already happened. At the most, it could go another 25 to 50 bps from here. Given that the long-term average for inflation is 6-7%, there is no room for rates to go down further. From a defensive perspective, fixed income will still be part of the client’s portfolio. But from an alpha perspective, the story will be over.
Rajesh Saluja: Clients have taken some advantage of the rate cut. Going forward, there will continue to be some arbitrage opportunities given the expected downward trend in rate cuts. I also see a bit of innovation in fixed income products including tax planning to improve overall returns. Clients can expect 8-10% through a combination of fixed income products.
Outlook Business: Has the Amtek blow-up affected investor confidence?
Rajesh Saluja:It has, so you have to know what you’re recommending. We believe debt carries more risk than equity because of its nature. When you’re recommending a fund over which you have no control, it boils down to selection of the fund manager, credit risk and strategy.
Outlook Business: Start-ups are red-hot. Is this true across the board?
Yatin Shah: We have just launched a fund called IIFL Seed Venture Fund. We raised ₹400 crore, of which over 50% went to investment managers who are investing only in the start-up space. The rest is kept aside for series A, B and C funding. But again, this is a very small pool of our clients’ portfolio at about 3%. Clients have not invested in PE because in India, the experience has been very poor in terms of single-digit return and no return at times.
Atul Singh: One of the challenges in the Indian PE space is that no established player actually raises money in India; they raise money abroad and invest in India. So, the opportunity for Indian investors to get into those credible names is negligible. These are long-dated products of eight to 10 years. The value will be created if the team not only executes what it has promised but also stays together for 8-10 years. How do you assess that?
As you start to invest, the business cycle or any other factor can change. So, it is a very difficult asset class, especially if you do not have very credible institutional fund managers. Who knows whether individual-led funds will survive for eight-nine years or not?
As a wealth advisor, the problem for us is that of illiquidity and the lack of transparency in terms of what is the right value. At times, the valuation does not reflect the true worth of that investment. The PE manager is not sitting with the client every month, but we are. And the client has concerns about what is happening with his investment. And if things are not going right, then there is the risk of that one investment souring the client relationship.
If it is a bad direct equity investment, you can get rid of it, but here you cannot. Very large investors understand and are comfortable with this very long-dated play. But somebody who puts in ₹50 lakh or ₹80 lakh is always concerned about what is the IRR. Though we look out for these opportunities, there are very few of them in the Indian context.
Rajesh Saluja: We are suffering due to the fact that not too many funds have done well. It is a new industry. Take real estate. When we launched a fund 10 years back, there were six funds that barely returned capital to the investor or are still stuck in deals where exit seems distant.
Post these learnings, real estate funds are now focusing on better quality investments and are likely to deliver promised returns. Similarly, PE funds in the past have been unable to deliver returns for various reasons but the learnings have been incorporated in the new funds where you are seeing improved performance.
When we raised our first RE fund, we garnered ₹325 crore. But the second fund post performance and exit helped us raise close to ₹1,000 crore in less than six months. Similarly, two years back, we raised a VC fund in the technology space where we garnered ₹100 crore. Now, we are raising the same fund again and in three months we have crossed what we had raised the last time because people have seen that it is a sunrise industry and India is leapfrogging in the technology space with good disruptive business models. Also, promoters who run old-economy businesses are seeing the way technology is disrupting their own business models and hence are eager to participate in this space through the fund route.
Yatin Shah: Facebook, Google, Apple and Amazon together have a market cap of $1,800 billion. In India, there is not a single listed company in this space. So, it won’t be incorrect to say that 10 years down the line, $200 billion to $300 billion of market cap will come from these specialised companies that India has not seen before.
Rajesh Saluja: Just like in telecom where India leapfrogged the landline adoption and went straight to mobile, we are seeing the same happening in retail where India is skipping the large mall or brick and mortar culture and going to online or mobile transactions. This is throwing up various opportunities for companies in digital consumer, enterprise software and medical and engineering software. Clients can participate in this opportunity by investing in a fund where fund managers come with the background, experience and expertise to not only understand the business model but also the ability to identify and back the disruptive models . It’s a great opportunity but selection of right fund, right strategy and right managers is critical.
Outlook Business: On that positive note, let’s conclude our 4th private wealth advisors roundtable. Thank you and wishing all of you a great investing year ahead.
This is part three of Outlook Business' 4th annual roundtable, Upper Crest. You might be interested in part one and two.
