Where The Rich Are Investing 2017

Where The Rich Are Investing

Here’s how India’s ultra rich are redeploying their wealth amid falling return from two prominent asset classes — real estate and fixed income

In a clear indication that the Street is awash with liquidity, the first half of FY18 saw IPOs raking in over Rs.26,000 crore, beating the previous record collection of Rs.21,000 crore seen in the first half of FY08. Not just that, even equity mutual funds are seeing monthly inflow of over Rs.20,000 crore, with a chunk (over Rs.12,000 crore) coming from HNIs and corporates. “We have seen a clear shift from physical assets to financial assets. Real estate, which traditionally occupied 30% of a HNI’s allocation, is today out of the reckoning. Demonetisation has only fuelled the shift which was already underway for the past couple of years,” mentions Anshu Kapoor, head of private wealth management, Edelweiss Financial Services. Considering that real estate rental yield has stagnated at a little over 2%, much lower than 6.75% yield fetched by a 10-year gilt, the switchover comes as no surprise.

Not just realty, even fixed income, thus far the most prominent asset class of HNIs with average allocation of 30-40%, is also seeing a shift. Today, a fixed deposit is fetching 5-5.5%, even as tax free bond return has declined by 200 bps to a little over 6%. “A large part of the fixed income portfolio is today exposed to interest rate risk as not more than 20% of a client’s fixed income allocation is locked in tenures of above 5 years. Their main worry is that if they are getting reinvested at 6-7%, how to increase the overall yield on their portfolio?” mentions Kapoor. 

With the Sensex having delivered over 22% return YTD, and, post-tax, fixed income return of over 4% just about meeting inflation rate, investors have no choice but to look at equity as an alternative. Given that almost all IPOs have listed at a premium during the year, there is a clear mania building up. Take the case of Prataap Snacks. The IPO, despite being priced at 202 times its FY17 earnings, saw its HNI book oversubscribed by 100 times. Not surprising that some wealth advisors are not too enthused about this gregarious appetite of HNIs. “The kind of complacency creeping into the Street that the liquidity flow will continue gives me a creepy feeling,” mentions Umang Papneja, senior managing partner and CIO, IIFL Investment Managers.

Though at 18x one-year forward, the benchmark doesn’t appear expensive, the possibility of an earnings downgrade in the event of a prolonged GST disruption and weak rural demand, owing to poor monsoon, could cap further upside. Besides, any setback in the year-end assembly elections in Gujarat, ruled by the BJP for close to two decades, could result in a sudden swing in investor sentiment. Aware of the challenges in investing in equities, HNIs such as Viju Jacob, MD of the Rs.1,800 crore Synthite Industries, says, “Equity investing is nothing short of lottery. Hence, I prefer sticking to large caps as they are not as expensive.” Then there are a few such as Rajendra Majithia, owner of the Rs.2,000 crore unlisted Urmin Group, and Arun Chittilappilly, MD of Wonderla Amusement Parks & Resort, who prefer to invest through mutual funds. “MFs are a safe bet as direct equity investing is a time consuming affair,” believes Majithia, a view endorsed by Chittilappilly as well.

Besides equities, the space of alternatives, especially angel investing and PE investment, is fast catching the fancy of HNIs. Entrepreneurs in the south, traditionally seen as conservative folks, in fact, are showing a huge appetite for such investments. Vikram Mohan, MD of Pricol, an automotive parts company, has invested over 50% of his personal wealth in such strategic investments. Though the average ticket size in such deals is not huge, the fact that old economy is warming up to alternatives is a distinct change.

That HNIs are an opportunistic bunch of investors is also coming across in the way they have taken to the EB-5 Visa program that provides permanent US citizenship, provided an individual invests $500,000 in the US that creates 10 local jobs. Jeff DeCicco, CEO of CanAm Investor Services, is expecting Indian HNIs to invest $100 million this year under the visa program. “The investment, usually, goes towards a common loan pool created to cater to Fortune 500 companies which could use the funds for constructing buildings and other physical assets [which in turn meets the job creation criterion],” says DeCicco. The fact that these loans fetch less than half a per cent return is not deterring Indian HNIs who see it as a small price for bagging a green card. “From 2007 to 2014, less than 30 applications came from India, now we are seeing over 200-plus applications annually from HNIs,” reveals DeCicco. 

Though the demonetisation and GST blues seem all-pervasive, the fact that luxury car makers in India have had their best-ever nine months sales this year indicates that all is well in the land of the rich.