The Altering Face of Wealth Management and Investments in India
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The wealth management industry in India has been through significant transformation over the last 5 years. The investment preferences and trends are also changing, with increasing sophistication and experience of investors. Unmesh Kulkarni, the Managing Director, Senior Advisor, Head - Markets and Advisory Solutions of private banking mogul Julius Baer (India) upholds the particular scenario that the country’s evolving investment market is undergoing for the last few years. Highlighting the various aspects of the country’s wealth management and investments, the banking giant shares insights.
The Evolving Face of Wealth Management
On an overall basis, wealth in India has been on a secular uptrend, with business entrepreneurship on the rise, across sectors and cities. “A number of new-age entrepreneurs have established a strong place for themselves in the newer business segments such as e-commerce, digital platforms and technology, with some of them successfully raising private equity capital, and some even monetizing successfully,” he mentions. At the same time, traditional business entrepreneurs have also seen a rise in their personal fortunes, with the equity markets having done well over the last five years or so.
Shift in Investment Spectrum
Post demonetization, there has been a sizeable shift of monies from physical assets to financial assets. Mutual Funds have seen huge inflows; in particular, equity funds. Overall risk appetite of investors has increased; large flows have gone into equity funds, resulting in a surge of Equity MF assets over the last 2 years. Explaining further, Kulkarni says, “Investors or entrepreneurs today are willing to experiment with newer and more complex products, and seek higher levels of information and service. With their overall wealth increasing, we find ultra-high net worth investors working with multiple investment managers as well as wealth managers, while some of them have also transitioned to more sophisticated and/or organized models such as family office platforms.”
Current market trends in India
At the start of 2018, Kulkarni opines that three global risks lurking in the markets have been seen – rising crude prices, trade war and global monetary tightening. These risks did play out for the most part of 2018 and kept both debt and equity markets volatile.
Citing the roadblocks speed breaking the market, he says, “Whilst the crude prices have come off, the trade wars as well as global monetary tightening continue, which are threatening to derail the global growth momentum, and are hence among our key themes for 2019.
For India, we believe 2019 to be ‘a year of two halves’. In the run-up to the general elections in April-May, the first half would likely be dominated by ‘Politics and Populism’. The second half, based on the election outcome, will be a tug of war between ‘Policy and Politics’.”
Equities: In the first half of 2019, the election rhetoric and the perceived risk of populist measures coupled with global uncertainties (trade war + tightening) will keep the Indian equity markets volatile with a downward bias, and hence the banker recommends to stay with “Best of Breed” equities. Post the election results, if the incumbent government is re-elected, one can selectively add “beta” to the portfolio.
While the Nifty declined 6 per cent 2018 in US dollar terms, it significantly outperformed other emerging markets (“EMs”) and consequently, its premium to the EMs is now above the 10-year average. Hence, despite the expectation of a strong earnings recovery (largely led by corporate banks), there is limited room for further re-rating of Indian equity markets.
Fixed Income: The recent crashes in oil prices, persistently low inflation and change in RBI Governor have raised market hopes of RBI becoming more dovish. The fiscal situation is however not in control, with low GST collections and disinvestment activity, as well as potentially populist dispensation in an election year. This coupled with global uncertainties will likely limit RBI´s ability to ease. We suggest maintaining a short duration in the first half of 2019, in the run-up to the elections.
The credit situation in the debt markets has also been under stress, post-default by the ILFS group and subsequent liquidity concerns emerging around NBFCs. Corporate bonds sold off in the second half of 2018 and spreads widened significantly. While we expect the credit situation to normalize in 2019, the risk-return tradeoff currently favours investing in high-grade debt (AAA / AA) over credit strategies.
Gold: With global uncertainties persisting and a possible slowing down of growth in the US, we expect Gold to do well over the medium term.
Asset Allocation Investors should Maintain in 2019
“At Julius Baer, we believe that the ‘Strategic’ asset allocation of an investor should not be a function of the current market outlook, but rather the investor’s risk profile and investment objectives (e.g., Conservative 75 per cent debt, 25 per cent equity, Moderate 50 per cent Debt, 50 per cent Equity, Aggressive 25per cent Debt, 75per cent Equity). The strategic allocation should, therefore, by definition, be steady through market cycles,” Kulkarni says.
However, investors generally have (and should have) a ‘Tactical’ allocation component as well, which is meant to capture the relative movement/ outlook with respect to asset classes. For instance, a +/- 5 to 10 per cent variance from Strategic allocation could be considered from time-to-time, depending on market outlook or even volatility in asset classes.
Currently, for a moderate profile investor, he states that Julius Baer would consider a balanced allocation of 45 per cent debt and 45 per cent equities, with 10 per cent allocation to opportunities in the alternatives space (esp. long short, gold, real estate-linked strategies).
Investment Opportunities for Entrepreneurs Outside India
“In India, given that we were a closed market for decades, most Indian investors (including HNIs) have a very strong home bias when it comes to investing. Indian resident investors have generally lacked the knowledge, experience and therefore the conviction for investing in overseas markets. Further, being an emerging market with traditionally higher inflation than developed economies, India has a higher interest rate structure and therefore higher expected equity returns compared to global economies,” he opines.
However, the strong investing bias is now changing. Investors in India have seen periods of under-performance of the Indian markets (esp. compared to US). And the secular depreciation of the Indian Rupee (vis-à-vis USD and other developed market currencies) means that investing globally provides a currency-hedge to the Indian investor.
The global markets are vast, and present several opportunities to Indian investors. Indian residents can access global opportunities directly through (a) the Liberalized Remittance Scheme (“LRS”) of the Reserve Bank of India, wherein they can remit monies overseas and invest directly in global securities, or (b) indirectly, through Indian Feeder Funds that have underlying investments into global securities or global funds.
“At Julius Baer, using the LRS route, we offer investors a very wide choice of investing in global markets, across asset classes, sectors and countries. We have a strong global Research team and a robust global investment platform, using which we try to deliver best-of-the-breed global investment solutions to Indian resident clients,” he concludes.