Do you think that forthcoming elections have the potential for a big shake-off and a big direction call for the markets?
The state elections have a lesser impact on the equity markets compared to the central elections. But I am not one of those who believe that should something dramatic happen in the general elections, the markets are going to go completely belly up! It will have an impact for a few days or at most, a couple of weeks. At the same time, I believe the developments in the country are reasonably on the right track. There will not be much of an impact whichever government comes to power, but there is going to be uncertainty and volatility.
Do you believe that if the FIIs continue to sell the way they have been, DIIs will be able to make up for the FII selloff?
Not quite. Having said that, I am a firm believer in the fact that equity investment is getting bigger and bigger in India. The SIP numbers are getting better and better. I would never advise anyone to move out of SIPs. Some portion of whatever is happening on the FII outflows could get taken care of by domestic mutual fund investments but not the amount that was last seen in October.
If the markets continue to be as volatile, would SIP inflows get challenged?
I have been pleasantly surprised by the numbers in August, September and October. In August, obviously the market was good but in September and October, we saw reasonable downfalls and yet SIPs did not see too many cancellations.
From that point of view, the investor today is behaving far more maturely than before. But one doesn’t know how long we will see investors being stable and not really pulling out.
What about other asset classes? Are you convinced about gold and real estate?
Apart from equity and fixed income, which are two standard asset classes, there are two or three asset classes which have been investor favourites for a very long time.
Real estate as an asset class had far more money coming into it from high net worth individuals than any other asset class in our country. I am seeing that shift dramatically. I have believed for last four-five years that real estate as an asset class is not going to give the kind of returns which it has given in the past.
But is it worthy of a small exposure at least?
Even if I say that people should not have an exposure to real estate as an asset class, they are not going to listen to me. They are going to do really state exactly the way they want to. But fresh assets are not going as much as they used to in the past. At the same time, people are looking at commercial real estate far more than they were looking in the past and that will continue to happen but for people looking at residential property purely from an investment point of view or land from an investment point of view, that portion is reducing dramatically.
Why would real estate continue to lag behind as opposed to any other asset class?
It is going to be pure demand-supply because if one looks at residential, with so many unsold units lying all around and sales not happening at the rate at which they were expected to happen, it is a pure demand-supply mismatch.
There is huge amount of supply and till that is taken care of — I am specifically talking of residential property and land — this problem of residential real estate investments will create an issue.
If we believe that the economy is going to grow at 6.5%, 7%, 7.5% GDP with inflation of 3.5-4%, which means nominal rates of 10-10.5-11%, then demand for commercial real estate is going to be there. People will look at commercial real estate for using. But others will look at buying commercial real estate and leasing it out for returns.
Equities are still looking hazy, real estate according to you is still a no-no. What about gold? Is it the go-to-asset right now?
We have never been a very big follower of or a fan of gold as an asset class. But gold is a completely risk-off trade. From an Indian investor point of view, gold acts as a perfect hedge for currency because it is priced at dollar per ounce. If we continue being on risk-off mode and from a dollar hedging point of view, I am seeing people making some allocations towards gold but I do not think it will be a substantially big number from a high net worth point of view.
When you say some, is it low single digits, beginning double digits?
Low single digits.
That is right.
What are the client categories at Kotak and what would be the ideal asset allocation for each?
On the basis of risk-profile of various individuals, individuals get classified into one of five buckets. That ehanges from secure to conservative to moderate to aggressive to growth. Each of these five categories would have different asset allocations. To give you an example, a person who is classified as secure would be more or less zero equity and a person who is classified…
Right now or for all time to come?
For quite some time, right from the time we have started this. So it secure has been a person who has been zero equity. And the other extreme, which is aggressive, would have as much as may be 100% equity and nothing else but equity and then everything in between.
For instance, a conservative investor would have may be up to 30% in equities. A moderate investor could have up to 50% in equity or growth investor could have may be up to 70% in equity and that is the way the ranges have been and the balancing portion has been in fixed income. That is broadly what the range of people have been. When we put an underweight call, obviously someone who is supposed to be let us say 50% in equity, would come down by a particular percentage.
So when you are talking about the aggressive investor, the guy who is willing to put in 100% in equities, are you seeing a behavioural change there? Are they saying that maybe 10% could go into fixed income?
It is happening to a certain extent but people who have been 100% equities (and I have seen 100% equities for the last five, six, seven years) have made serious sums of money and they have seen various trends and cycles in the market.
Having said that, what is happening is that the fresh money which they would have generated from their businesses or whatever is not going into equities one shot. That is staying out of equities. When one put the underweight call, maybe some portion of equities did get shaved off but not too much. But the fresh money which was supposed to go into equities is getting phased out.
Where is that fresh money going? Are people just keeping the powder dry, waiting for the right timing?
That is right. It is currently staying in a combination of liquid funds, deposits and whatever.
What is that new asset or new investment tool where people are willing to experiment? Is there any new theme that you at Kotak are particularly working on?
We will start seeing long-short strategies or absolute return strategies for extreme high net worth individuals. I very strongly believe that long-short funds or absolute return funds globally have a very large play around it and that is going to happen in India as well.
The other thing which I am not sure how it will pan out is exchange traded funds or ETFs. These are gaining popularity with HNIs again because the cost structures are low and for the last year or so, actively managed strategies have not managed to beat the benchmarks. A combination of these two things will see far more allocations happening in the months or years to follow.
When you say ETFs, would it be a particular asset class, only Nifty? What kind of ETFs are we looking at?
It could be a combination. Too early to say but I think it could be something related to benchmarks whether it is Nifty, whether it is bank Nifty or whatever. It is still some time away but it will happen. Having said that, the other thing which I was talking about is absolute return strategies or long-short funds. Already a lot of money has been picked up and it is the beginning of reasonably serious money going there.
If you had to construct a fresh portfolio right now for a conservative investor and for someone who is more risk savvy, what kind of portfolio would you construct?
Let us look at conservative individual. He would be 20-25% in equity, about 5-10% in absolute returns strategies or long-short funds and the balance would be in fixed income with maybe just 5 odd per cent in gold.
No real estate?
No real estate.
And what about the one who is a little more aggressive?
Let us look at a growth individual and not the aggressive individual. Maybe his original plan would have been about maybe 60-70% in equity, Today that number would be about 45-55% in equity, about 15-20% in absolute return strategies and the balance in fixed income.
In equities, what do you have in mind? Only largecaps, only small and midcaps or the balanced category? What be safer if you want to park fresh money into equities right now?
Today, we are predominately largecap. It could be as high as 100%. But it is not necessarily the case at all points of time. One keenly tracks how the benchmarks are trading or how the market is trading to various benchmarks whether it is the Nifty, or the midcap or the smallcap index, etc. But today, we are more or less 100% large cap.
As a wealth manager, what are the key three things that you monitor which are going to dictate and form your opinion on either equity or oil or real estate?
I keep saying this to not only the wealth managers but to every client as well that on a daily basis, you should have oil somewhere because the impact of oil on our country is going to be so huge that one has to necessarily see how oil prices behave.
Oil north of $75-80 is not good for us. We have been talking about this for quite some time, There was a great situation for the last three-four years where we had extremely strong macro but weak micro and now may be you are looking at exactly the reverse. We are looking at weak macro and improving micro. The biggest reason for weak macro is oil and that does not look like settling down at some price point or the other. It is a going to have a big impact on our economy and everything around our economy and we cannot shy away from the fact that high oil prices will lead to issues on CAD, issues on fiscal, everything around. I would advise every investor, every wealth manager to look at how oil is behaving because ultimately that is going to determine how the macros of our country behave.
What is the comfortable level or range in your mind for oil and what gets you uncomfortable?
I would have obviously said oil at $50 is great but that is utopian now. But at a firm level, we have taken a call saying that oil between $65 and $72 is something which we are very comfortable with but anything beyond that makes us uncomfortable.
As a wealth manager, are days getting harder and longer looking at the way the markets are?
Absolutely, it is. Today being in front of clients who have come into the markets in the last six or twelve months is tough. A significantly large portions of their wealth is in equities and the fact is no one likes losing money. The fact that they have lost money in the last six to twelve months is not the happiest of situations to be in, but that is the reality.
At the same time. this is a country where GDP is growing at 6.5-7-7.5% and inflation at 3.5-4% and so you are looking at a nominal growth rate of 10-11%. If the country is growing at 10-11%, corporate India should do better than that and as long as your investments are in those corporates which are growing at north of 10-11%, you should be good.