With equity, bonds in deep distress, where will HNIs put their money now
In equities, ultra HNIs are now willing to take larger direct stakes in companies.
Calendar 2019 was supposed to be the year of monetary tightening; however, escalating trade conflicts have significantly dented the growth outlook and investment climate, forcing policymakers to take an about turn in order to support growth and avert any hard landing.
Currently, a record $12.5 trillion worth of global bonds are fetching negative yields and this figure could rise further as inflation has not picked up as expected and monetary policy could turn even more accommodative in the future.
There are major repercussions of this loose global monetary policies and changing trade policies on investment climate and portfolio construction globally and India is no exception.
Many ultra-high net-worth individuals (UNHIs) in India have invested a substantial part of their financial assets in corporate bond funds; given the back-to-back negative credit events involving some of the prominent corporate houses, investor confidence has palpably taken a beating.
Moreover, the regulators have been initiating a raft of actions against errant promotors and companies with weaker compliance. To be sure, from a structural reform perspective, the renewed focus on compliance should bode well for the financial markets in the future. An obvious fallout from the liquidity crunch and credit events in the recent days is that strong companies will become stronger, and there may be a greater scope for consolidation in a host of sectors.
As compliance improves, the structural outlook for Indian companies should improve with time as the regulators tighten their grip further.
With this in mind, a number of large UHNIs with deep pockets are looking to invest in businesses with reasonably cheap valuations. At the same time, given the speed at which technology is transforming the business landscape, some of the new-generation entrepreneurs, known to be more aggressive and well informed, have come to realise the market risks.
They seem to be willing to monetise existing businesses – either via a stake sale or by forming joint ventures to gain technological or superior management advantage – and would rather invest in newer sectors to diversify risks.
With improving penetration of technology and ease of doing business in India, attracting foreign capital in many sectors has become easier now than in the past.
In the near term, though, the majority of the businesses are unlikely to do well given that the slowdown in consumption has spread wide. In addition, there are also concerns that the ongoing liquidity crunch and the recent credit events could spill over to other sectors. As such, most businesses now prefer to adopt a wait-and-watch approach.
For equity, while 2017 was a stellar year, return expectations in investment portfolios have been tempered significantly in 2018 and 2019. Other asset classes such as AIFs (alternative investment funds), investments in residential real estate, InvITs (Infrastructure Investment Trusts) have not performed well either.
Apart from weak sentiments, amid historically low inflation and a decelerating growth environment in India, return expectations are now lower for the next couple of years.
Where are the best investment opportunities?
While we do not see any quick fix to India’s slower GDP growth, there are pockets of good investment opportunities.
First, benign inflation and falling government yields have drawn Indian investors to real estate investment trusts (REITs), which is a vehicle that can bring good yields. Returns on commercial real estate, specifically in Bangalore and Hyderabad, are decent in our view. Despite the liquidity crunch and negative credit events, which are exerting pressures on the financial markets, some good companies with sound credit history are commanding better yields.
We also see a trend where UHNIs and family offices, who have a good understanding of the bond market, are willing to take higher and concentrated exposure to certain high-quality corporate papers with a lower duration, instead of buying fixed-maturity plans (FMP) or bond funds.
Similarly, in equities, UHNIs are now willing to take larger direct stakes in companies that have strong structural appeal. Traditionally, liquidity was an issue for small companies, but given the acceleration in financialisation of savings, the overall depth has been improving. UHNIs with higher risk appetite and longer term investment horizons are also willing to take exposure to unlisted equities or private markets, including stakes in startups.
With a stable government coupled with India’s strong structural appeal, we expect more and more international investors to commit capital to India. With better regulations, India is re-setting the way businesses have been operating.
There could be more pain in the near term, but in the investing world, where excessive expectations on returns and fear dominate asset-class performance, this economic reset offers a good opportunity for bottom fishing.
Looking at the global scenario, this is not the time to become extra aggressive, but one must see to it that the emerging opportunities are not missed.
(Iñigo Mendoza is Head of Wealth Management, India, and Jitendra Gohil is Head of India Equity Research at Credit Suisse. Views are their own)