There will be a decoupled revival of Indian markets’
The Hindu Business Line, April 12, 2009, Page 12
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The ingredients for sustained long-term growth are intact in India. Once India becomes an investment destination by choice, it will revive ahead of global markets.
--------------------------------------------------------------------------------
Mr Satyanarayan Bansal, CEO, Barclays Wealth
Aarati Krishnan
The risk-reward equation for investing in equities is more favourable today than it has been at anytime over the past year, says Mr Satya Narayan Bansal, CEO of Barclays Wealth. Predicting that India is set to emerge as an investment destination by choice for foreign investors, rather than one by default, he holds the view that India may recover ahead of other global markets, as domestic demand drivers are largely intact. Excerpts from an interview with Business Line:
What kind of impact has the stock market meltdown had on your clients?
While markets have become challenging, clients have become more concerned about the long-term health of their portfolio. They aren’t looking for quick returns as they did in the recent past. Even 18 months ago, clients would tell us that they were making a 18-20 per cent return irrespective of the stock or sector they were in. Even if you had a good idea to offer, they weren’t keen to explore it. Today, clients are far more open to explore new ways of managing wealth. I would say for an industry like private banking this is a good time to acquire clients and establish long-term relationships.
Do clients come to you with requests to help recoup money lost in the stock market meltdown? What do you then do?
It is a truth that wealth erosion has been quite pervasive both in stocks and the real estate space. What they have already lost cannot be recovered by a simple suggestion or two. But what we are doing is that, based on the financial behaviour of the client we try to align the portfolio to their risk profile and goals. The portfolio composition for a client has to be based on his financial personality and long-term goals. Irrespective of whether they can recoup earlier losses or not, clients need to be able to beat inflation and generate a reasonable return over it. They may require a better-than-debt return but may not be able to take equity risks. In this context, we have to find the right balance.
With interest rates globally at historic lows, there may be a case for higher risk-taking. But in India, when you have the opportunity to earn a 8.5 per cent return with a risk-free bank deposit, is there a case for taking on additional risk through equity investments?
When the markets are tough, debt becomes a natural choice for many investors. But to earn a reasonable return on the investment, a higher risk needs to be assumed. Equities in the medium to long term are bound to outperform debt. The basic logic is that shareholders of a business have to be rewarded more than the lenders to a business.
Investors who today think debt is the best option may chase stocks if they begin to deliver returns! If you look at the debt space today, there is a tactical opportunity available there as well. There is a possibility that the yield on G- Secs may come down, after some stabilisation. Even debt investors may make close to equity returns if they capture that opportunity. But the risk on that trade is almost close to equity risk. So investors need to have a longer duration view to do that.
You mentioned that the risk-reward ratio now favours equity investments. On what do you base that?
Our equity markets are now at low levels, aligned with the global meltdown. We feel that valuations in the Indian context for the given growth, even if it is at 5-5.5 per cent, are appealing. While there is de-growth in the global economy, our linkage to exports is lower than most others economies at 15 per cent of GDP.
Domestic demand drivers are largely intact. Capital formation is still at good levels, at a 30-33 per cent savings rate. Thus, the ingredients for sustained long- term growth are intact in India.
Once India becomes an investment destination by choice, it will revive ahead of global markets. That is why we feel that the risk reward is far more favourable today than they were during the steep valuations of last year.
Let us take the case of the markets falling by 10-15 per cent from these levels. Even then, we don’t expect the markets to sustain at those levels. For investors who wish to have an allocation to equities, such temporary blips will not affect the long-term health of the portfolio, provided they are willing to invest with a horizon of 2-3 years. Investments can be spread over the next 4-5 months to reduce volatility.
Every asset class has seen increased volatility in recent months. So how do you deal with that while structuring a portfolio?
I think volatility is not an exception any more, it’s a rule. In my view, volatility is a good opportunity to create long-term portfolios as it rewards risk-taking. When volatility is high, risk premiums are high; that can be used to make higher returns. For investors who do not want to take a directional call on the markets, volatility can be used to structure products.
For instance, we have seen equity market volatility at the 28-32 per cent in the Indian markets.
A few months ago that spiked to 70 per cent. Now, the view that many ultra-high net worth individuals took at that time, was that volatility would not sustain at that high level. It was a good strategy for them to capture the volatility risk premium — through a structured solution that allowed them to ‘short’ volatility.
The correlation between global and Indian stocks is quite high today. Is there a need for a separate India-specific strategy?
Yes. I think the story of decoupling has been debated very widely … the growth in Indian markets is going to be way ahead of the global markets. We’re talking of a 5-7 per cent growth, even as other economies talk of contraction. That requires a separate strategy. We believe that a revival of equity markets in India will be at a faster pace than revival of global markets.
India was an investment destination by default. Global investors were allocating a portion of their portfolio to emerging markets and within that, Indian markets were getting a share. But now that might change.
Investors globally might look at destinations which are still growing and India will be among the very few that are still growing at 5 per cent plus.
That may lead to a decoupled revival of the Indian markets. There are local nuances in India which will have to be factored into tactical calls.
What’s your prognosis for the property market? What are you telling your clients?
We haven’t come out with any formal view on property. Many of the investors in India have a very strong personal involvement with their property purchases and consider it a physical investment. But our broader reading is that the property market is heading for some more correction in the immediate future. That’s for the simple reason that the sector is facing a liquidity crunch and is unable to bring in users at current price levels, leave alone investors.
There is a lot of doubt in the minds of users on whether the project will be completed on time. That is changing the face of the industry. An industry which was running almost on negative capital, when the advances on projects were used to complete the project, now has to have much higher cash flows.
You need to have 100 per cent of the cash in hand before you start a project and realise cash from it. That is a complete shift in the way the business of real estate was being run. Therefore, if you leave aside local nuances, I believe that the real estate market will correct further. I would not be surprised if that correction is another 25-30 per cent from here.
We must also keep in mind that the rise in the Indian property market was much steeper and happened in a shorter timeframe than other global markets. The fall has to be in line with the rise. In stocks, prices start eroding ahead of volumes; but in real estate volumes decline ahead of prices.
The Hindu Business Line, April 12, 2009, Page 12
--------------------------------------------------------------------------------
The ingredients for sustained long-term growth are intact in India. Once India becomes an investment destination by choice, it will revive ahead of global markets.
--------------------------------------------------------------------------------
Mr Satyanarayan Bansal, CEO, Barclays Wealth
Aarati Krishnan
The risk-reward equation for investing in equities is more favourable today than it has been at anytime over the past year, says Mr Satya Narayan Bansal, CEO of Barclays Wealth. Predicting that India is set to emerge as an investment destination by choice for foreign investors, rather than one by default, he holds the view that India may recover ahead of other global markets, as domestic demand drivers are largely intact. Excerpts from an interview with Business Line:
What kind of impact has the stock market meltdown had on your clients?
While markets have become challenging, clients have become more concerned about the long-term health of their portfolio. They aren’t looking for quick returns as they did in the recent past. Even 18 months ago, clients would tell us that they were making a 18-20 per cent return irrespective of the stock or sector they were in. Even if you had a good idea to offer, they weren’t keen to explore it. Today, clients are far more open to explore new ways of managing wealth. I would say for an industry like private banking this is a good time to acquire clients and establish long-term relationships.
Do clients come to you with requests to help recoup money lost in the stock market meltdown? What do you then do?
It is a truth that wealth erosion has been quite pervasive both in stocks and the real estate space. What they have already lost cannot be recovered by a simple suggestion or two. But what we are doing is that, based on the financial behaviour of the client we try to align the portfolio to their risk profile and goals. The portfolio composition for a client has to be based on his financial personality and long-term goals. Irrespective of whether they can recoup earlier losses or not, clients need to be able to beat inflation and generate a reasonable return over it. They may require a better-than-debt return but may not be able to take equity risks. In this context, we have to find the right balance.
With interest rates globally at historic lows, there may be a case for higher risk-taking. But in India, when you have the opportunity to earn a 8.5 per cent return with a risk-free bank deposit, is there a case for taking on additional risk through equity investments?
When the markets are tough, debt becomes a natural choice for many investors. But to earn a reasonable return on the investment, a higher risk needs to be assumed. Equities in the medium to long term are bound to outperform debt. The basic logic is that shareholders of a business have to be rewarded more than the lenders to a business.
Investors who today think debt is the best option may chase stocks if they begin to deliver returns! If you look at the debt space today, there is a tactical opportunity available there as well. There is a possibility that the yield on G- Secs may come down, after some stabilisation. Even debt investors may make close to equity returns if they capture that opportunity. But the risk on that trade is almost close to equity risk. So investors need to have a longer duration view to do that.
You mentioned that the risk-reward ratio now favours equity investments. On what do you base that?
Our equity markets are now at low levels, aligned with the global meltdown. We feel that valuations in the Indian context for the given growth, even if it is at 5-5.5 per cent, are appealing. While there is de-growth in the global economy, our linkage to exports is lower than most others economies at 15 per cent of GDP.
Domestic demand drivers are largely intact. Capital formation is still at good levels, at a 30-33 per cent savings rate. Thus, the ingredients for sustained long- term growth are intact in India.
Once India becomes an investment destination by choice, it will revive ahead of global markets. That is why we feel that the risk reward is far more favourable today than they were during the steep valuations of last year.
Let us take the case of the markets falling by 10-15 per cent from these levels. Even then, we don’t expect the markets to sustain at those levels. For investors who wish to have an allocation to equities, such temporary blips will not affect the long-term health of the portfolio, provided they are willing to invest with a horizon of 2-3 years. Investments can be spread over the next 4-5 months to reduce volatility.
Every asset class has seen increased volatility in recent months. So how do you deal with that while structuring a portfolio?
I think volatility is not an exception any more, it’s a rule. In my view, volatility is a good opportunity to create long-term portfolios as it rewards risk-taking. When volatility is high, risk premiums are high; that can be used to make higher returns. For investors who do not want to take a directional call on the markets, volatility can be used to structure products.
For instance, we have seen equity market volatility at the 28-32 per cent in the Indian markets.
A few months ago that spiked to 70 per cent. Now, the view that many ultra-high net worth individuals took at that time, was that volatility would not sustain at that high level. It was a good strategy for them to capture the volatility risk premium — through a structured solution that allowed them to ‘short’ volatility.
The correlation between global and Indian stocks is quite high today. Is there a need for a separate India-specific strategy?
Yes. I think the story of decoupling has been debated very widely … the growth in Indian markets is going to be way ahead of the global markets. We’re talking of a 5-7 per cent growth, even as other economies talk of contraction. That requires a separate strategy. We believe that a revival of equity markets in India will be at a faster pace than revival of global markets.
India was an investment destination by default. Global investors were allocating a portion of their portfolio to emerging markets and within that, Indian markets were getting a share. But now that might change.
Investors globally might look at destinations which are still growing and India will be among the very few that are still growing at 5 per cent plus.
That may lead to a decoupled revival of the Indian markets. There are local nuances in India which will have to be factored into tactical calls.
What’s your prognosis for the property market? What are you telling your clients?
We haven’t come out with any formal view on property. Many of the investors in India have a very strong personal involvement with their property purchases and consider it a physical investment. But our broader reading is that the property market is heading for some more correction in the immediate future. That’s for the simple reason that the sector is facing a liquidity crunch and is unable to bring in users at current price levels, leave alone investors.
There is a lot of doubt in the minds of users on whether the project will be completed on time. That is changing the face of the industry. An industry which was running almost on negative capital, when the advances on projects were used to complete the project, now has to have much higher cash flows.
You need to have 100 per cent of the cash in hand before you start a project and realise cash from it. That is a complete shift in the way the business of real estate was being run. Therefore, if you leave aside local nuances, I believe that the real estate market will correct further. I would not be surprised if that correction is another 25-30 per cent from here.
We must also keep in mind that the rise in the Indian property market was much steeper and happened in a shorter timeframe than other global markets. The fall has to be in line with the rise. In stocks, prices start eroding ahead of volumes; but in real estate volumes decline ahead of prices.
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