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