Managing wealth: Look ahead, look wide

The year 2022 has been a bumper one for the rich and ultra-rich who have invested in the private equity space. Stellar public market debut of new-age tech companies has fuelled interest in unlisted equity of promising start-ups. Fortune India’s panel of leading wealth managers — Ashish Gumashta, CEO, Julius Baer Wealth Advisors India; Atinkumar Saha, head, wealth management, Deutsche Bank; Rajesh Saluja, MD and CEO, ASK Wealth Advisors; Sandeep Das, head, private clients [India], Barclays; Yatin Shah, co-founder and joint CEO, IIFL Wealth & Asset Management — offer a lowdown on the best investment options of 2022. The discussion was moderated by V. Keshavdev. Edited excerpts:

After a record run since the March 2020 low, is the party on the Street now coming to an end?

Atinkumar Saha: I don’t think the party is over yet given the expectations around GDP growth, despite the current supply chain constraints. Also, liquidity is not going to dry up as no central bank or government around the world is aggressively looking to bite the interest rate hike bullet. The only area that the market will keenly look at is earnings growth amid the growing spectre of inflation.

Sandeep Das: The long-term case for investing remains very robust for 2022. We expect global GDP growth of 4.5% and India’s growth is going to be much higher. But the wall of worry changes from GDP growth to CPI. So we should be prepared for more volatility amid higher interest rates and inflation. The way ahead would be sticking to appropriate asset allocation strategy and bottom-up stock picking.

Ashish Gumashta: The good news for India is that a new equity cult is emerging, and robust tax collections are likely to result in a pick-up in government spending, Though Q2 saw margin pressures, most clients have started hiking prices, which will be a pass-through to customers. Given that people made money not just in stocks but also in PE and fixed income, one should take some money off the table. So, though we are positive on the markets, one should approach this year with caution and prefer to buy on dips.

Yatin Shah: We see a valuation risk across all asset classes. Till Covid is completely out of the picture, we expect a more accommodative monetary policy, hence, the party could continue for some more time. On the inflation front, there’s been a huge amount of disruption on the supply side. Another trend is the shift in power from institutional to retail investors across asset classes. Today, 70% of NSE volume is retail and 50% of option trading volume is nothing but leverage. So, if there is any event or change in sentiment, we could see some bit of correction. Though the fall won’t be a sharp one, over the long term, India will continue to attract capital.

Rajesh Saluja: In 2019, valuations were higher than what they are today. Since then interest rates have come down and earnings have picked up. So, this market is still sustainable, keeping aside short-term risks. The PE on a trailing basis looks expensive, but based on FY22 estimates of 35% earnings growth, the market is quoting at 25 times. Further, interest rates are not running away in a hurry, so even next year the advantages of deleveraging will play out. Even if we assume 15% earnings growth in FY23, at 21 times earnings, valuation is not expensive.

Are HNIs re-looking at real estate? Is there a preference for direct investment, or through InvITs/REITs?

Saluja: It’s both. On the housing capex side, there is real demand coming in from people who want to improve their quality of life since their incomes have gone up. It is not investment demand but real end-user demand that has changed over the past six to nine months. It’s a cycle — whenever equities surge and interest rates stay low, real estate will see a revival. Besides, the rise of quality developers over the past four years has also made structured debt funds attractive.

Das: Given the weak supply overhang, I see a five-year cycle — with the beginning of end-user demand and later investors entering the fray.

Gumastha: We feel real estate will do well primarily because interest rates are low. When fixed income returns come down, Indians tend to allocate more towards real estate. On the commercial side, things are not exactly clear though a lot of money is flowing in from the likes of CDPQ and the Japanese. But given that employees are still working out of homes, the picture is not clear. But, one has to be cautious since real estate is a very illiquid asset class and there are concerns around the cash component coming back.

Shah: The big story for commercial real estate is that institutional funding will eventually lead to a clean-up of this sector. The story is in larger floor space getting rented out, with the likes of Google, Facebook, JPMorgan, and outsourcing and services industry seeking office spaces of half a million square feet. What’s big for the sector is the fractionalisation of ownership that is taking place. It’s a big tax arbitrage to own these listed units of REITs on exchanges, which is treated as equity tax after three years of holding. Depending on how it is structured, if it is majority owned by an India promoter, 92% of the rent income is distributed as a dividend, which is 100% tax free. Actually, that’s the only asset class after tax-free bonds where the dividend is 100% exempt for an HNI investor. So, incrementally, it will find a very large space in the portfolio for long-term investors. Now it looks like a value buy as NAVs are highly depressed. If a strong cycle comes back in the next couple of years and occupancy moves closer to 90%, a great revision will happen in these contracts. On the residential side as an investment theme, it is better to make money by buying stocks of good developers rather than buying a flat.

What happens if interest rates rise?

Shah: Mortgage rates will not move up very fast. Huge amount of balance sheet restructuring has happened. In the past, the biggest problem was the cost of financing to developers, which has now gone down, thereby bringing down the cost of buying homes. Hence, it’s a very good theme structurally. In the developed world, residential and commercial together is 10-15% of the market cap; it is 2% in India. There is a long way to go.

Cryptos have caught everyone’s fancy. How have HNIs warmed up to it?

Shah: As per SEBI rules we can’t advise on cryptos.

Saluja: The fundamental issue in crypto is that it is unregulated, and I will be surprised if central banks allow it to flourish. Most central banks are likely to come out with their own digital currency. If people start using payments outside the usual dollar trading, it can create a problem.

Gumastha: Julius Baer offers cryptos on its global platform, but not in India since we are not sure of the regulatory stand. Cryptos is a volatile asset class. However, globally, clients are asked to allocate 1-2% of their portfolio to cryptos.

Das: Let’s wait and watch.

Gold has underperformed relative to other asset classes. Do you see value?

Shah: Three months back we raised gold’s allocation to 5% in our model. We see the yellow metal gaining from the trend of a move towards safety.

Saluja: We added gold in our asset allocation at 5% since last year. Inflationary pressures will keep gold as a fairly attractive asset. We position it more of a fixed income-plus kind of product. It’s never going to give you anything really significant but 1-2% higher than fixed income over the next five-seven years. Given that during Covid four times more money got printed compared to 2008, there is a lot of liquidity and, hence, gold as an asset class over the long term makes sense.

Saha: At Deutsche, our allocation towards gold has always been at 5%. We don’t expect prices to spiral up much.

Other than gold, is there an opportunity in other precious metals? Also, will real estate be in play as well?

Saluja: Outside of gold, we don’t advise and we have no idea. On real estate, on a long-term basis, there is a huge demand-supply mismatch. So, the long-term story of Indian real estate remains. Even in commercial, while it is slightly more cyclical and linked to economic growth, even if GDP has to grow at 4-5%, on a long-term basis I see a shortage of good quality commercial real estate. Lastly, because of the reforms of the past three-four years, you will soon see in India real estate brokers also getting licenses like their global counterparts. All this will bring in transparency, accountability, and build consumer confidence.

Das: Construction materials and home-building companies will also benefit. I see real estate as a good potential inflation hedge.

How keen are HNIs about investing in new-age companies?

Saha: Clients are keen as opportunities have reduced on the plain vanilla debt side. Secondly, there are large surpluses coming into clients’ hands by way of divestment of businesses, and they are not looking at old-economy investments. These are next-generation clans who want to take higher risks and have seen the story playing out in the West. A lot of investment has also gone into feeder funds focused on the US and China, where such opportunities are plenty. However, there is very shallow understanding around valuation, and private bankers have a job explaining it to clients.

Gumastha: We have seen overseas private markets surging from $1.5 trillion to almost $4.5 trillion over the past decade. While we are telling clients to invest 5-10% of their portfolio in this asset class, what they need to assume is that this is a very illiquid asset class. As far as valuation is concerned, it is akin to saying that beauty lies in the eyes of the beholder. So, if you are getting into these businesses, it’s better to understand the risk.

Das: Valuation concerns apart, new tech is here to stay. Global exposure really broadens the opportunity set. In 2022, US-quality companies will be in focus but Europe, Japan and other emerging markets will see a lot more action.

Is the valuation justified?

Shah: From a valuation perspective, a different matrix is used. It’s not about bottom line but more about growth and top line. There will be failures, but there will be some very unique market leaders and that’s the whole story about technology companies. Today, Zomato and Swiggy are dividing the market share in the food tech business and the size of the market is huge. We are not the first country to do it. We have seen it playing out in China, in the US and other markets as well. We are going through a similar path — maybe we will do it in 10 years, or five-six years. There are already 50-plus unicorns in India and some of these companies will get listed on exchanges. So, it’s a great strategy to play, if you believe in technology.

Are clients happy with Indian new-age tech companies or are they seeking opportunities overseas?

Shah: International investing is mostly through feeder funds. The LRS [liberalised remittance scheme] is still a very small portion [of clients’ portfolio] since it doesn’t offer too much flexibility. A good part of LRS goes into education, residential expenses and then comes investments. In feeder funds, it’s a top-down approach based on MSCI country weightages, followed by bottom-up investing through certain funds. On the domestic side, we have a late-stage fund which has Indian companies, but with global revenue models. Though the IRR looks very attractive early, the real value addition or market cap change happens when you are closer to an IPO. So, Zomato took 13 years to reach $2 billion. But pre IPO and post IPO, it hit $15-16 billion. So that compounding came in two years versus $2 billion that took 13 years. Since it is difficult to access an unlisted market, these are some of the arbitrages which can improve the probability of success.

Has the Paytm debacle tempered the outlook around IPOs?

Shah: We don’t have Paytm in our fund as we find fintech a difficult space to understand, particularly Paytm, as to how it operates, and how the business model will work out. But we feel investors will reward good companies, good promoters, and good businesses.

Saluja: There is some sense of rationality kicking in. Investors have learnt to differentiate between good quality and bad-quality businesses. Even after the Paytm IPO, there were a couple of issues that saw huge oversubscription. It’s all about looking into the future, about predicting who will be the one or two leaders in each segment. The focus will be on client acquisition but at some point pricing will kick in. The game in tech is tough to understand but at some point they will, probably, cover up all the losses in just two-three years. In the interim, there will be froth but tech is here to stay.

Besides feeder funds, are clients looking at investing overseas via investment migration kind of programmes?

Gumastha: Today, most Indian HNI families are becoming global with almost every family now having one member living overseas. That’s a big opportunity as people want to invest in businesses overseas.

Saha: HNIs now have businesses which have become global and they want to participate in those economies. Besides the UK and the US, emerging markets, too, are finding favour. There is also a diversification in dollar terms if you factor in a minimum 3-4% depreciation in the rupee.

Das: A lot of families are becoming non-resident Indians [NRIs], especially with the next gen studying overseas. But we are also seeing NRIs based abroad showing an appetite for investing in India as part of their geographic diversification.

Will capital conservation take precedence over higher return in CY22?

Das: It’s not an either or question. We want a constructive portfolio comprising equites, private assets, global exposure, select credit and so forth. We expect more volatility accentuated by intermittent spikes. Though long-term investing is here to stay, return will be muted next year compared with 2021.

Saha: For highly aggressive clients, we will look at more equity and less debt in the coming year. But in a conservative portfolio, they need to remain as they are. Where clients have made a lot of money, and the asset allocation has got skewed because of that, we would recommend getting into debt.

Gumastha: I am cautiously optimistic as the data out there seems to be inconclusive. We don’t know how the Omicron variant will play out. The US Federal Reserve is talking of tightening interest rates and we don’t know if inflation is being impacted by the demand side or supply side. So, it’s better to stay invested, and take some money off the table. If there is a steep correction then it’s an opportunity to invest.

Shah: In the long term, both earnings and price to book is one standard deviation away from the long-term average. There could be a time correction if not too sharp a price correction.

Saluja: Going ahead, the focus of central banks would be growth and not inflation targeting. We are at the cusp of a superb decade for India. All the past four-five years of clean-up or reforms are beginning to show in a positive manner. Our focus with clients will be more on growth assets compared to fixed income. We don’t believe interest rates are going to trend higher in a hurry in India. Earnings should be fairly good even as new-age businesses create productivity enhancements. Our allocation will be more towards large caps. Alternate assets remain 10-15% of the growth portfolio across VC funds, tech, and direct investment opportunities. Around 10% of equity still remains global as a lot of innovative and good companies are available, but that play is not there in India. Risk in India has always been higher on fixed income compared to equity, contrary to what people believe.