investment strategy | HNI | startups: Don’t panic about volatility, HNIs looking to buy now: Anshu Kapoor
Give us an idea of the type of conversations you are having with your customers right now. I guess most of their portfolios must be slightly in the red given that most of the portfolio would have peaked in October-November. Is the large HNI community waiting for another drop to buy?
Yes, there has been a volatility crisis that clients have had to deal with over the past couple of months and it hasn’t been easy. The most critical question everyone asks is: have conditions changed? What does Fed tapering mean for India now? What is its impact on the market and the economy? I think these questions have been raised but at the same time unlike previous bull markets where a lot of leverage was building into the system luckily for us right now the leverage isn’t there or rather quite low.
There is therefore no pressure on the position of the clients. You sell positions if there’s a big drop or volatility in the markets and so there’s comfort, confidence and a fair amount of belief that India is pretty well positioned in the current environment. I don’t feel any kind of panic. On the contrary, we receive questions about where and what to buy.
Are most of them fully invested or have they, in consultation with you, increased their cash level? Where are the levels of interest in deploying silver?
Overall, there is a good amount of cash available in the portfolios. There has been some profit taking by our clients and obviously last year was a turning point in terms of returns and so there was some profit taking. There is a small tweak based on advice we give to clients in terms of stock or thematic positions.
For example, we are currently quite overweight in banking and some positions are moving from IT to banking or even telecoms and industrials. There will be quite a bit of shuffling happening in the portfolios and this is mostly in the equity portfolios. On other asset classes like fixed income, there is very little choice and clients are demanding products that can give a bit of a high yield.
Finally, there’s a huge demand in the private markets and there’s this belief that Nifty will make the transition or the new economy will come into Nifty and the other indices that we have. Hence, there is a demand for products or solutions that provide access to new age Indian businesses that will hit the markets very soon. So there is a strong demand for late-stage private equity, venture debt, venture capital, and so on. A new asset class that has emerged in recent years.
Admittedly, this new asset class is making many of them feel FOMO (fear of missing out) because it has complex technology at work in so many places. How do you navigate the risk of exposing your community of customers in this new economy class to unsuitable prices or valuations, whether on the private side or just before the IPO or even during the IPO ?
I agree that price is the only thing that matters. Finally, you can buy a great business, but if you pay too much, you may not make too much money. That said, for us the recommendation to clients has been to go through high quality funds. Many high quality funds are available today, including a few funds managed by us, and these funds have proven to be resilient and selective in investing.
Valuations are a parameter, so don’t get carried away. First of all, you should not be attracted by yourself to trade on a single stock, because you do not have all the information. If you own a tiny amount in a billion dollar company, you have no right to information. So what I’m trying to recommend to investors is that there are a lot of these unlisted securities available on a trade-by-trade basis. So maybe we should consider a fund. This is recommendation number one.
Recommendation number two, look at the evolution or size or life stage of the fund. Obviously, when you enter a very early phase, the risks are higher, whereas if you choose a fund that only invests in mature or adult start-ups, the risk is lower.
The third recommendation is to look at the fund’s investment strategy. There are a few themes that are very visible to us and they will play out very well over the next three to four years. For example, the whole theme of the electric vehicle revolution. India will become the largest two-wheeled electric vehicle ecosystem in the world. There’s no doubt about it, so maybe watch something like this. Look at clean energy. We have a huge clean energy roadmap and that’s something I recommend. The third can be health technology, digital technology, agricultural technology.
So there’s these four-five big fat ones that I can talk about piece by piece. So instead of getting carried away with FOMO, remember that this is a structural story and it will be available to us over the next five to 10 years. So there is no urgency. You have to go with the fund manager who is in no rush to deploy and I totally agree that valuations may not be at the best levels at the moment.
What about the bond part of the HNI portfolio with increasingly high rates? In recent years, the focus has been entirely on equities. How is fixed income doing and what do you recommend on that side?
Our recommendation is to wait and not lock in returns from traditional fixed income products. But there are a few products available that will allow you to secure good returns and IRRs, including Real Estate Investment Trusts (REITs) and InvITs or Infrastructure Investment Trust. There, on a pre-tax basis, the REIT will yield close to 6.5% to 7% with upside potential. It is also very liquid. Similarly InvITs will give a higher before tax and with liquidity. So don’t tie up your cash right now, that’s the recommendation.
If rates are trending up, wait and watch before adding duration. Until then, stay in what you call accrual products or hold-to-maturity products, but as rates rise, customers will have more and more opportunities to lock in. Keep it simple and check out some of these products for kickers and with cash. Let’s see how this plays out as we don’t know what pace of tightening will be followed by both the Fed and the RBI.
Finally, how is the interest in foreign stocks predominantly American? Over the last year and a half this has also become almost a fad with many funds launching their versions of US exposure in different ways but there has been a very reasonable correction especially in technology and the FAANGs. Has this hurt demand for US stocks among HNIs?
Yes definitely. I think Indian clients need to diversify because for 99.9% of our investors, all wealth is tied to India, the Indian rupee and the four or five asset classes in India. It makes perfect sense to diversify into the other 97-96% global market capitalization.
Looking at the flows over the last couple of years, the total international investment through mutual funds and ETFs is a market size of Rs 50,000 crore and if I’m not mistaken, 70% of that money has been flying over the past two years. So there is opportunistic money but I would still advise systematic diversification and investment in global markets. The United States is certainly the largest market, but there are other markets as well. So go out and diversify, but make sure it’s strategic diversification, not opportunistic.
There are many themes which are still not listed or available in India like EV theme or blockchain or deep tech or apex or automation. Some of these things are not yet available in India and so they are sunrise themes. Many products are available to examine these themes and can build portfolios as we move forward and remain in the broader market.
So select high quality ETFs to start with and then drill down into those themes or stocks, because at the stock level you will see a lot more volatility. The NASDAQ, for example, had a blistering run last year, but was down 10% from peak to peak. As it is only down 10%, this is something that can be supported, but if one enters very small stock level charts, one may suffer a bit more. So be careful but diversify.