Outlook Business (OB): 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.
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.
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?
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 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.
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.
This is Part Two of Outlook Business' 7th annual private wealth roundtable, Upper Crest. You can read Part One here.