"Shorter End Of Fixed Income Curve Looks Like A Safe Bet"

All that could go wrong went wrong in 2018. After a phenomenal run in 2017 — what with the benchmark Sensex clocking 29% return — equities continued to head north till the mid of 2018. However, a lethal combination of rising interest rates, a sharp spike in crude oil prices and the IL&FS credit crisis took the wind off the bull run. The deteriorating macros and a rate hike in the US triggered a massive foreign portfolio outflow. Given that India’s macros will not change overnight as crude is still hovering near the $75/barrel mark and the rupee is languishing at 72 levels, it’s unlikely that foreign investors will come back in a hurry. Though domestic flows through MFs have been robust, given that the one-year return is flat to negative for most funds, whether retail flows will persist is still in question. What further compounds the outlook towards equities is the fact that the general election is due early next year — a surprise outcome could further drag down the market, which is already looking for cues of an earnings recovery.  With so many imponderables ahead, Outlook Business held its seventh private wealth annual roundtable in Mumbai. Here’s what the country’s leading wealth advisors had to say

Outlook Business (OB): Welcome to the seventh Outlook Business annual private-wealth roundtable. Last year this time, the mood was really upbeat, and most of you were also optimistic. What is the sentiment like this year?

Deustche Bank

Minimum ticket size

• € 1 million

Assets Under Advisory

• Rs 13.5 billion

Assets Under Management

• Rs 153 billion

Asset Mix In 2019

Balanced

• Equity 40%

• Debt 50%

• Alternatives 5%

• Gold 5%

Aggressive

• Equity 60%

• Debt 25%

• Alternatives 10%

• Gold 5%

Conservative

• Equity 20%

• Debt 75%

• Alternatives 0%

• Gold 5%

Outlook 2019

Favoured Sectors

• Private sector banks, Consumer staples, IT

Sectors To Avoid

• Telecom, Pharma, Infrastructure

Top 3 Equity Funds

• ICICI Prudential Bluechip Fund

• Kotak Select Focus

• Invesco Contra

Top 3 Debt Funds

• ICICI Prudential Short Term Fund

• Franklin India Short Term Income Plan

• IDFC Corporate Bond Fund

Expected Return

• Equity: 12-15% over three years

• Debt: 8-9%

• Gold: 3-5%

• Real estate: 3-5%

• Alternatives: 15-20% over three years

Atinkumar Saha, head, wealth management, Deutsche Bank: We had a good run till August. Clearly there was a major fillip to equities, but post September, there has been a sea change in sentiment. So, clients are returning to the time-tested neutral-allocation model. Moderation has started seeping in and, in equities, where they used to expect 16-20% return, they are now looking for only 12-15%. In debt, 60-70% of clients are happy with a 9% yield. As a bank, we have gained over the past few months because clients have started favouring deposits over liquid funds, and we are advising them to move to the shorter end of the yield curve. Primarily, clients have become risk averse and many are looking for opportunities offshore given that the market in the US has done well. So, we are also scouting for cross-border opportunities. As far as real estate (RE) is concerned, the introduction of Rera and demonetisation have dampened sentiment. However, some clients have participated [in RE] through financial products.

BNP Paribas

Minimum Ticket Size

• Rs 200 million ($3 million) for Private Wealth Management

• Rs 500 million for Family Office Services

Assets Under Management

• Rs 922.07 billion

Asset Mix In 2019

Balanced

• Equity 49%

• Debt 43%

• Alternatives 8%

Aggressive

• Equity 65%

• Debt 20%

• Alternatives 15%

Conservative

• Equity 25%

• Debt 70%

• Alternatives 5%

Outlook 2019

Favoured Sectors

• Private sector banks, Consumption, IT

Sectors To Avoid

• Real estate, Telecom, Utilities

Top 3 Equity Funds

• Kotak Standard Multicap Fund

• HDFC Top 100 Fund

• HDFC Mid Cap Opportunities Fund

Top 3 Debt Funds

• Aditya Birla Sun Life Short Term Opportunities Fund

• HDFC Corporate Bond Fund

• Franklin India Ultra Short

Expected Return

• Equity: 12-15%

• Debt: 7-9%

• Alternatives: 15-20% (Pre-tax)

Himanshu Mehta, MD & CEO, BNP Paribas Wealth Management India: We see uncertainty both on the equity and debt side. The front end of the yield curve looks much better from a risk-adjusted standpoint, and we are encouraging clients to go into ultra short-term and short-duration funds. Concerns include the rising interest rate in the US and domestic market, rising deficit and, with election round the corner, fiscal discipline is in question. We are telling clients that correction is healthy, though we are looking at a very narrow stock-specific market.

Yatin Shah, co-founder and executive director, IIFL Investment Managers: Last year, all the macro headwinds were tailwinds...crude, current account deficit (CAD) was positive, low interest and easy credit. All of these were feeding into equities and debt. Over the past six months, everything has changed. There have been rapid rate hikes in the US, the NBFC crisis has dented confidence, crude has spiked from a benign $45-60 to $80 levels, the CAD and fiscal deficit have turned negative after three-and-half years, and foreign institutional investors (FIIs), too, have started pulling out. It is definitely a challenging environment.

OB: Are investors fearful? What are HNIs really concerned about?

Shah: Thankfully, larger clients have kind of matured, and understand the whole cycle of greed and fear. They are taking a measured approach to investing in equities and are waiting for the macro to turn favourable before taking a long-term view. Depending on the election results in five states, CAD turning positive, oil and rupee, we will decide whether to go overweight (OW) on equities or not. Right now, it’s more neutral...it will not be a binary call. At best, clients are only looking at tactical calls.

Jaideep Hansraj, CEO, wealth management & priority banking, Kotak Mahindra Bank: Investors today are reasonably mature as I have not come across a panic situation. We have been underweight (UW) on equities for a while now given the extremely weak macros. We have never ever had a situation where both crude and rupee were trading at similar levels. So, one needs to exercise caution over the next six months.

Sandeep Das, managing director, private banking, Standard Chartered India: There seems to be a fair bit of consensus that macros have indeed turned challenging, and that it will spill over to 2019. Though there may be a home country bias, DII (domestic institutional investor) and SIP (systematic investment plan) inflows may not be able to counterbalance all the outflow. A rate intervention by the central bank is on the cards during the first quarter of 2019. In the US, the Fed will hike rates, perhaps three more times, and the European Central Bank (ECB) might also follow a tightening stance. Trade tensions globally won’t impact India in the long term, but they will in the medium term. You have to look at all these factors and decide on your asset allocation.

Rajesh Saluja, MD & CEO, ASK Wealth Advisors: When we met last, we said return from equities would be 15-18%. Till August we were on course, but the NBFC crisis accentuated the fall. Surprisingly, Nifty earnings grew 13% in FY18, and was again up 15% in Q1. For the full year, consensus one-year forward estimates are at 17%. The trailing P/E is at 20x, which is not so expensive. Barring the base effect of GST, fundamentals were looking good. The rupee was depreciating in line with other EMs (emerging markets), oil was looking risky but has now stabilised. So, the real issue was earnings and growth. Going forward, the NBFC crisis will subdue earnings, but if one takes a long-term view, it is time to go OW on equities. When the index hit 34,000 levels, we told our clients to increase their equity allocation by another 10% with a bias towards large caps. The market might not see a further P/E expansion, but we will see earnings growth. If earnings hit 16-17%, then we are getting a reasonable value today.

Our advice to clients is to go OW on equities. Fixed income is only 30-35% of our book and, luckily, we have remained at the shorter end of the curve. The challenge was with clients who had a huge exposure to fixed income. It was a double whammy for them as they got hit both on their fixed income and equity portfolios. Clients who didn’t have a huge exposure to fixed income are, in fact, increasing allocation toward equities. In fixed income, we are advising clients to stay put at the shorter end of the curve. Also, over the past one year, we have been allocating 5% of our clients’ money to international investments. In fact, our exposure to the US has done very well with 13% return and, with the 12% rupee return, the overall return has worked out to 25%. In RE, we are suddenly finding some good opportunities as NBFCs have stopped funding developers.

IIFL Investment

Minimum Ticket Size

• Rs 50 million for Private Wealth Mgmt

• Rs 250 million for IIFL One

Assets Under Management

• Rs 1.41 trillion as of June, 2018

Asset Mix In 2019

Balanced

• Equity 46%

• Debt* 44%

• Alternatives 5%

• Realty 5%

Aggressive

• Equity 74%

• Debt* 11%

• Alternatives 10%

• Realty 5%

Conservative

• Equity 15%

• Debt 65%

• Alternatives 5%

• Liquid 15% *

Includes 5% in liquid

Outlook 2019

Favoured Sectors

• Private banks, Insurance, IT & IT services, Chemicals, FMCG

Sectors To Avoid

• PSBs, Telecom, Infra, Real estate, Cement

Top 3 Equity Funds

• Aditya Birla SL Equity Fund

• Mirae Asset India Equity Fund

• Invesco India Contra Fund

Top 3 Debt Funds

• Axis Banking & PSU Debt Fund

• IDFC Corporate Bond Fund

• Aditya Birla SL Corp Bond Fund

Expected Return

• Equity: 13-15%

• Debt: 8-10%

• Alternatives: 15-18%

Shah: The bulk of the borrowings of NBFCs, which was supporting RE, has come from MFs and banks. The problem is that they were borrowing short and lending long. Perhaps wholesale NBFCs have a lot of exposure to wholesale RE, and not on the mortgage side or LAP (loans against property) side. NBFCs will have a tough time refinancing bonds and commercial papers. We haven’t seen a haircut per se and, thus far, there was a musical chair going on where the [debt] papers were passed on from one NBFC to another or to a RE fund or a private equity fund. The environment will now get very challenging.

OB: So, is that a risk or an opportunity?

Shah: First, a risk and then an opportunity, but that is not yet priced in.

OB: Anshu, how are you viewing the macro landscape?

Anshu Kapoor, head, private wealth management, Edelweiss Financial Services: We must look at the global context as to why the macro is playing out the way it has. Till last year, the Fed balance sheet had got inflated to $4.4 trillion from $800 billion in 2008. The Fed last year said it will start unwinding by $10 billion a month and increasing by $10 billion a quarter. This year, unwinding is $50 billion a month. Over this year and the next, the Fed unwinding will hit $1 trillion. Another development is that following the tax reforms in the US, $400 billion of the $1.5 trillion cash held overseas by US corporations went back to the US last month. As a result, across the world, we are seeing a dollar squeeze. If the ECB begins unwinding, we will see a further crunch. Also, the US will run a fiscal deficit of 4.4% ($930 billion) and will have to issue $400 billion-$500 billion worth of T-bills. This will put further pressure on interest rates in the US. If rates go up, we will have to increase rates here as well, otherwise how will we protect our currency? People who understood what was happening early on were cautious. In our own case, we came out of mid-caps around January-February this year. We are looking at ways to protect client portfolios by either cutting leverage, introducing hedging or by lowering exposure to mid-caps. But there are a lot of opportunities too. For example, a three-year SBI perpetual bond today fetches 9.15% whereas a three-year SBI deposit yields 6.75%. So, clients can take advantage of such dislocation in the fixed income space. Also, there is a new asset class emerging — distressed assets and structured credit funds.

Kotak Mahindra Bank

Minimum Ticket Size

• Rs 50 million for Private Wealth Mgmt

• Rs 500 million for Family Office Services

Assets Under Management

• Rs 2.48 trillion as of September, 2018

Asset Mix In 2019

Balanced

• Equity 63%

• Debt 33%

• Alternatives 4%

Aggressive

• Equity 75%

• Debt 15%

• Alternatives 10%

Conservative

• Equity 25%

• Debt 70%

• Alternatives 5%

Outlook 2019

Favoured Sectors

• Financials, Consumption

Sector To Avoid

• Cyclicals

Top 3 Equity Funds

• Kotak Standard MultiCap Fund

• Mirae Asset India Equity Fund

• Axis Bluechip Fund

Top 3 Debt Funds

• Axis Banking & PSU Debt Fund

• IDFC Banking & PSU Debt fund

• L&T Triple Ace Bond Fund

Expected Return - Post Tax

• Equity: 12-15%

• Debt: 7.5-8%

• Alternatives: 8-12%

OB: So, will the next one year be determined by domestic factors?

Hansraj: I have always held the view, in all these years in the capital market, that from an India perspective, we need to keep one eye on crude, because that plays a key role in determining which way we are headed.

OB: So, the macro for us is primarily spoiled by oil.

Hansraj: Exactly. Let’s face it — crude has a significant bearing on both our CAD and fiscal deficit, and I am not even getting into the argument that electronics import has become the next big item. Also, the general belief in India is that the rupee will depreciate 3-4% per annum, that is, at the difference in inflation rate between the two countries. There is nothing wrong with 65 going down to 75 over five years, which is effectively a 3-3.5% per annum depreciation. But the fact that the fall has happened suddenly, in a short span of time, is unnerving. Also, we seem to be in for a high interest rate regime, because if the view is that the US is going to hike rates (quarter percentage) three to four times between now and December 2019, then you could look at the 10-year US yield at 4%, which means we are looking at 10-year Indian gilt at 8.5%...

Kapoor: I just want to add to what Hansraj has to say — I completely agree that crude will be a key determinant. At Edelweiss, we joke that if we have 33 million gods and goddesses, why don’t we have one for oil!

Mehta: It’s a combination of both global and local factors. But in the wealth management business, clients don’t want to hear economic analysis. Ultimately, they are looking for advice and, hence, we need to come back to the basics of asset allocation and also consider fundamentals. If you look at the BSE 500 index, it was down 4-5% by September-October, unlike mid-caps and small-caps, which had seen a sharper fall. Interestingly, 44% of the BSE 500 stocks have dropped more than 30%. We don’t know what is going to happen with the macros and trade wars, but this is a good time to start building a fundamental-driven large-cap portfolio.

Saluja: Let’s face it — with macros, over 20-25 years, we have seen it all — interest rates going up and down, oil flare-ups, the Asian crisis, and then the Lehman crisis. Broadly, the consensus on oil is that it will hover in the $75-80 range. Our research also shows that rising interest rates won’t send the market tumbling down. Rates have been high for many years, and so have been earnings. Even elections don’t have a long-term impact.

Standard Chartered

Minimum Ticket Size

• Rs 60 million

Assets Under Advisory

• $10 billionAssets under custody

• $27 billion

Asset Mix In 2019

Balanced

• Equity 30%

• Debt 55%

• Alternate 5%

• Gold* 1%

• Cash 9%

Aggressive

• Equity 36%

• Debt 47%

• Alternate 10%

• Cash 7%

Conservative

• Equity 16%

• Debt 80%

• Alternate 0%

• Cash 4%

*Allocation to Gold is via Funds

Outlook 2019

Favoured Sectors

• IT, Private banks, Consumer staples

Sectors To Avoid

• PSBs & NBFC, Telecom, Utilities

Top 3 Equity Funds

• ICICI Pru Bluechip Fund

• Kotak Standard Multicap Fund

• Invesco Contra Fund

Top 3 Debt Funds

• UTI Short Term Income Fund

• Axis Strategic Bond Fund

• ICICI Pru All Seasons Bond Fund

Expected Return

• Equity: 10-12%

• Debt: 7-9%

• Alternatives: 10-15%

OB: Jaideep, you are UW equities, but are there any exceptions?

Hansraj: Of course there are; like the consumption theme and the private sector banking space. In the $1.1-trillion banking market, PSBs account for 65% share and private banks hold 35%. If the banking sector grows at 15-16% per annum for the next five to six years, we are looking at private and public banks holding 50-50 share in a $2-trillion market. The other sector is pure consumption. We are a $2.5-trillion economy and if we grow at 7-7.5% GDP, we will become a $4-trillion economy in six to seven years. History has it that the moment a country's per capita crosses $2,000, discretionary spending goes through the roof. It’s not only FMCG majors such as Hindustan Unilever that would benefit, but we are looking at consumption as a much more broad-based theme.

OB: But within the consumption space, aren’t we seeing a slowing in the auto sector, thanks to rising interest rates, the spike in fuel price and now the hike in third-party insurance premiums?

Saluja: I don’t think so. Look at the Q2 results of Hero, they reported their highest ever two-wheeler sales.

OB: You will see the impact in Q3

Das: You will have to look at urban and rural sales. Urban sales have slowed down, but sales of two-wheelers and tractors are still high.

Shah: In an election year, it will not come down.

OB: This is a nervous market. Is this the time to buy?

Kapoor: The consumer doesn’t care about the market or the P/E multiple. It’s all about consumption. We will get a lot of opportunity over the next 12 months.

Saha: Stocks that have a strong corporate governance history and are fundamentally sound can be looked at. Large caps will do well, with concentrated bets. IT is now in favour, consumer staples is also looking good.

Hansraj: We are taking a staggered approach to investing. Four months back, we came up with a small managed portfolio. Uncertain of the timing, we decided to break it up into three parts. We have invested 30% as of June, ten days after the state election results come out, the next 30% would be deployed and the last 40% would be invested 10 days after the general election result is announced.

Kapoor: If clients are concerned, like a lot of our clients have been, we move them out of actively managed funds and advice them to buy structured products that give you capital protection. But we tell them to stay invested in the market. And anyway, as I said, most people are nowhere close to their target equity allocation. So, you’ve got to ensure your client keeps investing whenever the opportunity comes.

OB: What kind of structures are you selling now? In the past, a lot of structured products have come and gone and lots of investors have really burnt their fingers. It’s not been a happy experience in India.

Kapoor: Not really. We track numbers on this. Among our investors, almost 90% who have invested in structured products through us have actually taken home a return in line with what was anticipated. It’s a great tool to lower volatility of your portfolio as well.

ASK Wealth

Minimum Ticket Size

• Rs 50 million for Private Wealth Mgmt

• Rs 500 million for Family Office Services

Assets Under Fee-Based Advisory

• Rs 420 billion as of August, 2018

Asset Mix In 2019

Balanced

• Equity 45%

• Debt 50%

• Alternatives 5%

Aggressive

• Equity 65%

• Debt 20%

• Alternatives 10%

• International 5%

Conservative

• Equity 25%

• Debt 70%

• Alternatives 5%

Outlook 2019

Favoured Sectors

• Private banks & NBFC, Consumer staples, Retail, Pharma

Sectors To Avoid

• Textiles, Commodity, Real estate

Top 3 Equity Funds

• ICICI Pru Bluechip Fund

• HDFC Small Cap Fund

• Mirae Asset India Equity Fund

Top 3 Equity PMS Managers

• ASK PMS

• Invesco

• Motilal Oswal

Top 3 Debt Funds

• Kotak Corporate Bond Fund

• IDFC Corporate Bond Fund

• Axis Banking & PSU Debt Fund

Expected Return

• Equity: 15-18%

• Debt: 8-9%

• Alternatives: 20-25%

Saluja: There is no leverage in these products.

Shah: It’s very interesting to note that last year, after 10% long-term capital gains tax was placed on equity, structured products ended up having a level playing field with mutual funds. So, today, there are structures that are very popular, which will give you 125% of the Nifty participation. If you take across all large-cap funds, very few funds in last three years have outperformed the index. So, structures have become more attractive now because it also gives you capital protection and, as Jaideep said, you can actually keep investing in three to four tranches to take advantage of the different market levels.

Saha: If you have promised a return and achieved it, but if the market moved very differently at that point of time and gave better return, then clients could end up being unhappy with structures. They can say, okay, I have got the promised return but it does not match with that of other market-related products.

Kapoor: Most of our clients, about 85%, are looking at 12-15% pre-tax return. If you are disciplined and rational, you can achieve that.

OB: Any safe havens in this volatile market?

Mehta: Cash!

Shah: Insurance, AMC business, wealth management companies. The big opportunity is the growth in fintech and microfinance space. Look at how an unheard name like Bandhan Bank today enjoys a market cap of over Rs 500 billion. The other trend is how the Insolvency and Bankruptcy Code (IBC) is proving to be a big gamechanger. Look at the Essar case, it would not have been possible without the IBC. The code is making a distinction between quality promoters and crony capitalists. Bad promoters won’t get money from the banking system. Tax collection is improving with the tax base being widened. All of these bode well.

Edelweiss Financial

Minimum Ticket Size

• Rs 100 million

Assets Under Advisory

• Rs 980 billion

Asset Mix In 2019

Balanced

• Equity 40%

• Debt 50%

• Alternatives 5%

• Gold 5%

Aggressive

• Equity 60%

• Debt 25%

• Alternatives 10%

• Gold 5%

Conservative

• Equity 20%

• Debt 75%

• Alternatives 0%

• Gold 5%

Outlook 2019

Favoured Sectors

• Private sector banks, Consumption

Sectors To Avoid

• PSU banks, Infrastructure

Top 3 Equity Funds

• Aditya Birla Sunlife Frontline Equity

• Mirae Asset Equity Fund

• Motilal Oswal 30 Fund

Top 3 Debt Funds

• Axis PSU & Banking Debt Fund

• HDFC Overnight Fund

• Edelweiss Arbitage Fund

Expected Return

• Equity: 12-15% over three years

• Debt: 7-8%

• Gold: 3-5%

• Real estate (Credit): 15-16%

• Alternatives: 15-20% over three years

OB: Next year, how do you see the market panning out?

Saluja: Opportunity exists in equities, as we are seeing an earnings recovery. But there are many events that will make markets volatile. Hence, it is better to focus on large caps. We are not focused on structured credit products and prefer the plain vanilla way of equity investing. RE has thrown open opportunity following challenges in the NBFC space over the past couple of months. So, there could be an opportunity for clients to get into RE funds.

Das: Last December, mid-caps were trading at 45% premium to large caps, today they are quoting at a discount of 4% to large-caps While we are looking at opportunities to enter the market, our preferred asset class is short maturity bonds.

Jaideep: Majority of the clients would be looking at us to preserve wealth. Hence, keep it simple. Follow an asset allocation model and keep doing the small tweaks. If you feel the market is getting overheated, go UW. The biggest risk remains crude as we don’t know how it will play out over the next six to 12 months. Hence, I am not desperately looking out for opportunities in this market.

Saha: For the next six months, we need to stay on the sidelines but we should end up with 12-15% return from equity and 8-9% return from debt by the end of the year. The latter half of 2019 will surely see a rebound.

Mehta: I agree. The second half of 2019 should see a positive return. As a theme, we like IT, consumption and private sector banks. One cannot predict geopolitical risks — we don’t know what Trump is going to do next! But if you believe in the fundamentals and direction of India’s economy, do not invest with a short-term view. While our biggest risk now is geopolitical, we cannot factor that in our analysis. Hence, we have to go with what we know and what we have learnt from the past.

OB: Thank you gentlemen for sharing your valuable insights, and wishing all of you a great year ahead.