After two strong years, stock market investors should lower their returns’ expectations for 2022, says Ashish Shanker, MD and CEO of Motilal Oswal Private Wealth (MOPW). However, he believes the medium-term outlook remains strong and there is no need to reduce risk dramatically. Speaking to News9 as part of the Market Mavericks series, Shanker, who manages monies of HNIs, advises clients to stick to their asset allocation based on risk appetite. Edited excerpts from the interview:
Q.1. As a private wealth entity, you work with high net worth clients. What is the minimum investable asset that you look for from a single client?
A. In the private wealth business, we work with individual families to help them allocate their savings. Typically, our clients have portfolios upwards of Rs 2.5-3 crore.
Q.2. With the huge run-up in the stock market in the past couple of years, what is your advice in terms of asset allocation?
A. Normally, we follow an asset allocation approach depending on the client’s ability to take risks. We have a pre-defined asset allocation for every family. So, let’s say a family is risk-averse, the normal range of equity allocation is 20-40 per cent. What we are advising this year for clients is to stick to their asset allocation. So, if your strategic allocation to equity in your portfolio is defined as 30 per cent then one should go with that allocation. If you are over-allocated, then at the margin you could trim. But if you are under-allocated, you could gradually get to that 30 per cent.
We are entering 2022 with valuations being slightly above average. However, we are not bearish on equities. There is no need to reduce risk dramatically at the same time you should continue with your asset allocation decided by your financial advisor or wealth manager.
Q.3. What role is debt playing in portfolios of HNIs?
A. Obviously, debt is a big drag in most client portfolios. Good quality bonds, AAA-rated, are currently yielding 5-6 per cent and as you know, inflation is also currently running at close to that number. However, the way to see it is that there are years where debt underperforms inflation but there are many years where debt outperforms inflation. Just because debt is a drag currently does not mean that someone should change their risk appetite and move aggressively to equities.
Maybe you should view the next year or so as a period where debt underperforms and equity continues to do well. We also expect that this will be a year, or the next couple of years will be the time when interest rates will tend to move up and debt yields will gradually become attractive. At that point, you can readjust your portfolios. Currently, in a fixed income portfolio, what we are telling clients is that you should be in a debt that has low maturity. At the same time, there are many structured debt options able to beat your traditional debt. That’s where a lot of HNIs are focusing.
Q.4. What are some of these structured debt options? A. These are NCDs of corporates where we are comfortable with the credit. We are also offering products in the real estate space with high-quality developers. We have real estate funds that are able to capture the real estate opportunity in the financial space. These are a few options where HNIs are tilting their portfolios. You need a balance. You cannot completely do away with the high-quality AAA part of your portfolio because that’s the insurance in case something untoward happens. Remember, markets are unpredictable. However, some parts of the debt portfolio can go into high-yield debt options, some of which I mentioned so that, at a portfolio level, you are able to achieve a return that is higher than inflation on the debt side.
Q.5. How are HNIs looking at real estate and gold at this point?
A. Historically, real estate has been a very high allocation for families. We don’t count their own residences as an investment. However, other than that, any real estate holding is counted in the portfolio. The last five years have been very challenging for real estate. Prices have not gone anywhere. In fact, prices may be even lower in certain cities. However, going by what we are seeing in the last four-five months and the fact that interest rates are low, affordability is high. We are beginning to see real estate pick-up. However, in financial portfolios, most families at the margin are reducing their real estate investments and are moving to financial assets. Gold at best is being used as insurance in portfolios. When we construct portfolios for families, we typically recommend that gold should be 10-15 per cent of financial portfolios. Sometimes what happens is that traditional families hold a lot of physical gold. In that case, we say you can hold 5 per cent. If there is a pandemic or geopolitical tension, gold does well and that helps your portfolio.
Q.6. Stock markets have been quite volatile of late. Where do you see them moving in the near term?
A. The last two years have been very kind for the markets. In fact, in 2020 despite the pandemic, the market ended on the positive. Last year was again a strong year where Nifty ended up higher around 23-24 per cent. However, some of the smaller and mid-cap stocks did much better. After two strong years, normally one has to lower the expectations. There are many events this year that will determine the course of markets. In the shorter term, you have an election-heavy calendar in India. There is this pull and push between inflation and interest rates. The US Fed has already indicated that it will be normalising liquidity and raising interest rates. So, that will definitely be something to watch out for as it impacts global liquidity. These are the factors that will determine short term-market movements. In the longer term, the fundamentals in India as a country and corporates are looking very strong. In the next three years, the trajectory looks very strong. However, this year, if the makers do a high single-digit or low double-digit return, I think it would be par for the course after two strong years.
Q.7. Since you said you are bullish about markets in the next three years, where do you see the pockets of opportunities and which sectors are avoidable?
A. After a long time, the fundamental set up in India, as well as corporate, is looking extremely strong. What has happened over the last few years is that most corporates have deleveraged their balance sheets and paid back the debt. The interest cost in their P&L has dropped dramatically. A lot of reforms that the government had implemented, whether it was GST or RERA for real estate, have resulted in more efficient corporates emerging and consolidating the sectors. Across sectors, the fundamentals are looking very strong. However, if I were to point out a few sectors that look more promising than the others, then I would say all the sectors linked to the investment side of the economy. There are broadly three pockets that drive investments in the economy. One is the government. So, government balance sheets are going to look very strong. GST collections are at a record high. Corporate and income tax collections are also looking pretty strong and the government is going to continue spending on infrastructures, such as ports and roads. Therefore, companies linked to these sectors will do well.
The second pocket of the economy that drives investment is individual households. Now, for individual households investments also mean buying real estate that is looking strong. So, sectors linked to real estate will do well, whether these are developers or allied sectors linked to real estate such as cement suppliers of pipes and sanitary ware. The entire ecosystem is likely to do well. The last one is private capex, which is not yet happening in a full-blown manner. The reason is capacity utilisation is not hitting 80-85 per cent in many sectors. In some sectors, we have already seen an announcement of capex happening especially metals and mining where there has been underinvestment for many years. We see capacity expansion happening later on in the year in sectors linked to PLI (performance-linked incentive scheme). These are fundamentally good sectors. Consumer durables also should do well. However, sectors linked to consumer staples did well in the last cycle, and may underperform going forward.
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