“We urge investors not to look at high coupon opportunities with rose-tinted glasses. Risk and return are directly proportional and those fundamental drivers will never change,” says Sriram Iyer, Chief Business Officer, Religare Macquarie Wealth Management. He tells Sunil Kumar Singh there are opportunities galore during an economic slump

Are you seeing any change in investment pattern of High Net-worth Individuals (HNIs) at a time when the economy is slowing down?

The economic uncertainty has directly increased market volatility and this has led to investors adjusting their portfolios to protect capital. Investors have become more risk averse, and prefer to invest in assets that are familiar and offer security of capital, and hence are more prone to investing in high visibility-fixed coupon ideas.

Moreover, investors are shying away from active equity participation given the low differential between fixed income returns and expected equity returns in the short to medium term. In fact, higher risk fixed income instruments with real estate collateral are increasingly finding favor, given the higher visible coupon and perceived quality collateral. However, enforceability of that collateral is suspect.

Where are Indian HNIs investing now?

HNIs are still investing largely in fixed income, though with declining interest rates, there is a hunt for blended structured solutions (offering fixed coupon coupled with market participation) and other instruments (albeit with riskier credit), offering visible higher coupon backed by security.

Is it going to be more difficult for young entrepreneurs to create wealth in the future?

With the advent of liberalization in the 1990s, the country saw the potential of entrepreneurship not only as an entry-level employment generator, but also as a means of wealth creation. The country as a whole saw a growing interest in entrepreneurship, fuelled by factors such as growth potential of economy, changing social and cultural milieu, global success of several Indian firms, emerging opportunities in different sectors and lower capital requirement in IT and service sectors.

If India wants to eventually be a developed country in the longer term, the government should realize that only entrepreneurs can help it grow at the desired rate. The government should continue to frame pro-business policies, providing the education systems, infrastructure and stable macroeconomic and policy environments crucial for supporting economic advancement, in order to nurture and promote budding entrepreneurs. So, there is a need for Indians to venture out into the world of entrepreneurship, build intellectual property and create wealth, which hopefully will find its way back into the system to fund more start-ups. Where India stands in the global economy in 20 years will very much depend on whether or not its government gets its act together today.

Where should HNIs look for growth in the time of economic slump? Which are the sectors where you see big opportunities?

In periods of economic uncertainties, investors forget to abide by the timeless principles of investing. At Religare Macquarie Private Wealth, our core value proposition of providing simplified wealth solutions to our clients abides by these principles, namely (i) strategic and dynamic asset allocation methodologies, (ii) monitoring and rebalancing investor portfolios on a regular frequency, (iii) ensuring the underlying assets within the portfolio have negatively correlated assets and (iv) focusing on the sum of all parts and not the individual parts – a holistic portfolio based approach of managing wealth portfolios. 

That said, we constantly advocate to our clients that there are more opportunities in a time of economic slump. We are recommending that they participate in evergreen or defensive sectors to provide stability to their portfolios, participate in fixed income opportunities after thoroughly evaluating risk and collateral associated with the specific investments, and finally how to utilize institutionalized structured product platforms to create a blend of fixed income and equity returns to their benefit. 

How do you see real estate as an investment avenue compared with other asset classes such as equities?

Indian investors have traditionally had significant exposure in real estate. There is a certain level of comfort, given the physical nature of the asset class. However, investors tend to fall prey to euphoria and participate in opportunities without understanding underlying credit and execution risks. We recommend participating in this asset class through institutionalized mechanisms of real estate funds.

Fundamentally real estate and equities are different in the way they deliver returns. Real estate derives its value purely from demand-supply while equities as an instrument allow you to participate in value created by the firm through delivery of products and/or services.

We believe in allocating and diversifying assets across protection, growth and aspirational assets — which is primarily risk-based allocation that always precedes a traditional asset allocation based approach.

India's stock markets have lost much of their gains after advancing this year. What's your outlook going forward?

We don’t make short term calls on markets since that is driven by demand-supply and sentiment more than fundamental economic factors. We advise investors to participate in this asset class with at least a clear five-year view and maintain an asset allocation discipline whenever irrationality in markets offers profit booking or rebalancing opportunities in the interim. While most economic indicators are currently looking weak, we continue to strongly believe in the fundamental consumption strength of our economy. We believe that the index will deliver nothing less than 12-14% CAGR in a three-year timeframe from where we are today.

With gold still trading much lower than its peak, what advice do you give to investors - should they invest in gold, hold or liquidate?

Year-to-date gold has lost nearly 18% in dollar terms and 14% in rupee terms, and gold demand in India is expected to decline in FY14, which would be a positive for the economy since it would help narrow the trade deficit and hence the CAD. However, despite the continued muted outlook for the year, asset allocation is the mantra to follow. We advise our investors to hold anywhere between 5-10% (depending on their risk appetite) of their total assets in gold as a part of their asset allocation strategy with a long term view. Gold being a non-correlated asset to equities and debt, acts as a diversification tool in the portfolio and is also an effective hedge to inflation.

What is the most important investment risk that you caution your clients about?

We urge investors not to look at high coupon opportunities with rose-tinted glasses. Risk and return are directly proportional and those fundamental drivers will never change. While there may be short term inefficiencies offering some high-return opportunities these will be merely tactical in nature and would not help in creating long term wealth. Higher returns will always carry higher risks. It is our role as wealth managers to point these out and educate clients on what are seemingly "safe" investment opportunities – there is no such thing called a free lunch.