It cannot get tougher than this. With global markets melting and every asset class straining, wealth managers are facing an uneasy task of managing HNIs’ wealth. In such circumstances, Manoj Shenoy, CEO, EFG Wealth Management India, the Indian arm of Switzerland-based multi-billion dollar EFG Group, a specialist in global wealth management, details to Raghuvir Badrinath, the discussions they are having with their HNI clients on managing their wealth. Edited excerpts:
What are the major shifts wealth managers, a focused one like yours, seeing today compared to the one during 2008? And how are HNIs discussing options with you on getting good returns?
We assess that the present market backdrop is starkly different from the doomsday scenario of 2008. Moreover, post the global financial crisis, the relative resilience of many EM (emerging markets) economies, in general, and India, in particular, has led to increased investor faith in these economies/markets.
Unlike 2007-08 when foreign investors were extremely gung-ho on the Indian market (decoupling argument), this time the level of excitement is limited. While, flows into equities in the last two years have remained satisfactory, year till date flows in 2011 has remained subdued suggesting lesser exuberance of FIIs towards Indian equities. Similarly, exuberance from the domestic investors both retail and institutions is now stark in contrast with the 2008 levels. Indian institutions have seen negative inflows over the last two years and therefore it can be deduced that the animal spirit among Indian investors are running at low levels.
Earnings growth expectations are far more reasonable than what it was in 2007-08. Similarly, valuations are far more reasonable. The overall health of corporate India is better than that in 2008. Indian market is trading at 13.7x 1 year forward P/E ratio as compared to 24x in FY07-08. India’s broad market is far cheaper. Indian small cap index is trading at Rs 7x 1 year forward P/E versus over 13x in FY07-08. Indeed, the Indian market is trading at well below average multiples compared to its history as well as of its peers.
Indian macro variables have remained challenging for the last 3-4 quarters. The expectations from Indian economy are far more muted compared to FY07-08. We might have already seen the worst of the inflationary pressures and consensus expects a GDP growth of less than 8 per cent in FY12. Over the last few quarters, market has focused on negatives in the Indian economy, ignoring the robust expansion of the domestic economy. Since FY08, domestic economy has grown 65 per cent, while India’s market capitalisation has fallen 20 per cent. India’s market cap to GDP ratio has fallen from 145 per cent in FY08 to less than 80 per cent now. Falling oil and commodity prices bode well for the economy and the equity markets.
Indian investors have become much more mature, informed and aware post-2008 crisis.
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In 2008, a major exposure of the clients was into aggressive equity, real estate and low grade bonds as the economy was booming with 9 per cent plus growth plus there were constant upgrades of the Indian equities earnings and economy by top brokerages, ignoring what is happening in the rest of the world, especially the West. Now, the environment is quite cautious and stable.
Given such a delicate situation, how should one approach the equity markets?
Cyclically, inflation should start tapering off to some extent soon while interest rates might start falling after a few months. For a structural improvement, the country needs to boost the investment cycle. In the long term, we need strong manufacturing policies to boost exports like what has been done in other emerging markets. Only then can concerns be structurally addressed.
On the positive side, given the sharp underperformance against other emerging markets, the moderate valuations and the expected cyclical reduction in inflation and interest rates, we might see markets consolidate. The volatility driven by the Eurozone will of course be the most important driver in the immediate term.
We expect more time-based correction and expect the markets to oscillate in a broad trading range till reasonable clarity emerges from the various local and global macro headwinds. In case of a negative outlier event, the markets may fall further in the wake of panic selling. However, we do not expect the markets to sustain at such levels. In such an environment, timing the markets would become extremely difficult. Investors should not be perturbed by market volatility and should remain focused on long term goals and asset allocation. We believe any sharp cuts should be bought into from a three to five year perspective. We would, thus, recommend buying into direct equities from a three to five year perspective in large caps and selective quality midcaps that have been short listed in our Model Portfolio. Investors should follow the strategy of buying direct equities systematically in a staggered manner and equity funds through SIP’s and STP’s without bothering about the market levels.
The ideal advice in these times is to go in for sovereign bonds — but with many a sovereign bond shaky today — how should one place ones bet at this valuable instrument?
In the present uncertain environment, no investment instrument is 100 per cent safe. The AAA bubble was one reason why risk was not priced correctly. What happened subsequently was a rude wake up call for many global banks as securities that once seemed safe bets turned out duds. The banks are now getting a second shock. It is now increasingly clear the sovereign bonds issued by governments are not that safe either. The fiscal crisis in Greece, Italy and some other European countries is a reminder even government debt comes with certain risks. The best credit rating should be available only to the strongest issuers, be they corporate or sovereign. Only 16 of the 131 governments rated by Standard and Poor’s now have an AAA rating.
The Indian economy and corporates are in a much better shape than rest of the world as Indian economy is consumption-based and corporates here are less leveraged compared to the developed economies. Unlike the West, most of Indian Government Fiscal Deficit is financed by internal holdings. India’s external debt has, for some time now, not been the primary concern. Within the overall debt, the share of short-term loans has risen a little more but there is no immediate risk as the endeavour of the RBI is to keep the ratio of short-term debt to overall debt low. While the Indian economy remains vulnerable due to its Dollar linkage and dependence on oil prices, this has been the case for a long time. India has been running a fiscal deficit, but it cannot be considered ill-advised for a growing economy to do so. The economic fundamentals in India are far better than in Europe. The reserves and maturity profile of debt, the fact that short-term debt is backed by adequate reserves and India’s growth differential compared to others are favourable.
There have been concerns on the fiscal and current account deficit. But, a default is unlikely since there are no immediate solvency or liquidity concerns. Most of the debt is held internally and growth in the economy is high. Debt is unlikely to be a worry so long as the nominal GDP growth is higher than interest-rate growth.
So the bonds and NCDs issued by Indian governments and corporates with good credit rating are comparatively safer than other counterparts of the world. Therefore, Indian debt funds having exposure to government & corporate bonds are comparatively safer.
In terms of corporate bond curves, what is the best bet between short-term income plans compared to the medium term income & dynamic bond funds and fixed maturity plans?
We believe short-end rates have peaked in March 2011 and the yield curve would incrementally steepen. The basis for this is that apart from expected rate hikes and system liquidity deficit, a major trigger for short end rates to rise was a sharp rise in the credit to deposit ratio of banks in the last quarter of calendar year 2010. Owing to higher deposit rates since January - March quarter, credit to deposit ratios had stabilised in that quarter and is expected to fall subsequently. This would protect short-end rates from rising much further despite incremental rate hikes from the RBI. Hence the ‘front end’ of the corporate bond curve (1 - 3 years) was favoured and accordingly have been recommending short term fund since March 2011. In line with expectation, the yield curve has incrementally steepened.
Thus, while the curve was inverted in March, it is almost flat now. This process is likely to continue as RBI is likely to pause on rates and credit demand continues to slow relative to deposit growth.
The spread between the one year point and the three year and five year points is hardly a few basis points. Plus, as the liquidity improves, and the overnight rate comes down from the repo levels to the reverse repo levels over the next six to 12 months, the shorter end of the curve can come down significantly. Hence, we maintain the view that the most compulsive trade is that of curve steepening and continue to favour investments in the 1 - 3 year segment of the corporate bond curve.
Therefore, the short term fund remains a strong core product recommendation. On the other hand, Medium Term Income & Dynamic Bond Funds can deliver good returns over long periods of time — hence should be seriously considered for longer time horizon, while Fixed Maturity Plans with 2-3 year horizon may come with attractive yield and can be considered by conservative investors.
How does the age-old stable and reliable options of gold and real estate stand out in such a context?
With economic growth faltering, the credit crisis in Europe deepening, accelerating inflation, continued low interest rate regime in developed countries, possibility of additional quantitative easing in advanced economies, all of which would impact returns in other asset classes and thereby impair the risk taking capacity of investors. Gold on the other hand is still seen as a safe haven and continues to attract demand from all segments, which would in turn lead to the resumption in the price rise.
Central Banks are seen to maintain their gold buying levels contributing to the increase in demand. The lacklustre performance of the stock markets and the high inflation rates that have been eating into bank deposits would further push investors here towards gold.
The weak economic fundamentals of the US economy would negatively impact the value of the dollar which in turn would fuel gold demand (by holders of other currencies) and prices.
In terms of looking at the option of real estate assets, there is indeed a good demand from developers for investors. Developers, who are finding it difficult to secure funding from banks, are raising money from wealthy investors through such products. Real estate structured products are becoming popular among HNIs within the alternate asset class category. Ultra HNIs are increasingly investing in commercial real estate generating fixed income.
They are also entering into joint development agreements with the developer for commercial ventures.