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Growth On Speed Dial

In India, there is much anticipation that the financial sector reforms that the current government has undertaken will help pave way for a faster and more sustainable growth for the nation in future

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In the past three years, we have seen a clear trend of Indian high-net-worth (HNW) investors showing an increasing ability and willingness to take on more risks, moving from a purely wealth ‘preservation’ mode to more of a wealth ‘building’ mode. It has been almost 10 years since the last financial crisis and concerted efforts by central banks have put financial markets on a much stronger footing.  

From Physical to Financial Assets

In India, there is much anticipation that the financial sector reforms that the current government has undertaken will help pave way for a faster and more sustainable growth for the nation in future. We can always debate whether policies ranging from demonetisation to the overhaul of the indirect tax regime to GST will benefit in the long run, but one can be sure that the policies will at least result in better tax compliance. With digitalisation and the increasing formalisation of the economy, savings are being channelled more and more toward financial assets such as mutual funds and equities, among others, away from traditional modes of investments of physical assets such as real estate and gold.

Growth in Alternative Investment Products

With these significant policy changes, we see more innovative products being introduced or are about to be introduced to Indian investors including AIFs (alternative investment funds), REITs (real estate investment trust), InvITs (infrastructure investment trusts), and hedge funds, among others.  In the lower interest rate regime in India — our view is that interest rates will structurally come down in India — these products will attract more and more interest, along with the traditional debt and low risk funds.

More importantly, a startup culture is booming in India. The second generation of HNW investors is more informed due to the prevalence of Internet and increased exposure, and they are more open to investments in non-traditional products. They are keen to look at various investment options in totality rather than individually to diversify their risks and get best values out of their assumed risks. They are also willing to experiment with new products while keeping in mind their risk appetites.

Over the past few years, private equity funds have attracted a lot of attention as the ecosystem for startups has improved significantly. This has helped in the overall diversification of risks and has also lowered return volatility. Instead of investing in listed companies, some HNW investors with higher risk appetite and longer time horizons have shown greater interest in investing early through venture capital or via private equity. This is a higher risk strategy and investors may need to wait for years before they see actual returns on investments.

Traditionally, real estate, both commercial and residential, has dominated the private equity business, but thanks to digitalisation, better technology, data availability and social media, we are seeing a plethora of investment options for private equity investors, largely in the field of fintech, Internet, travel, food, leisure, among other segments. We expect this trend to continue as India embraces new technologies with a clear push from the government.

The startup ecosystem is evolving rapidly and HNW investors with the wherewithal to withstand the veracities of private equity investments are willing to put their money to work. The IPO market is also booming giving good exit opportunities for private equity investors. We expect this trend to continue and are structurally bullish on the Indian equity market and economic growth. HNW investors should make good use of the current improved business climate in India.

Wealth Protection via Diversification

We are also cognizant of the fact that valuations today look bit on the higher side. Currently, there are various factors such as lower interest rates, cheap capital and ample liquidity, which are keeping interest rates artificially lower in developed markets. There is also an expectation of acceleration in global growth conditions, which may not fructify.

The US Federal Reserve has already approved the unwinding of its balance sheet, starting October, and Europe too will see a gradual tapering in the near future. As a result, interest rates globally should rise and capital may fly out of India to more attractive destinations. Against this backdrop, we remain cautiously optimistic. This is a typical cycle and investors should keep in mind the importance of asset class diversification and wealth protection as well.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Magazine 28 October 2017

Iñigo Mendoza

The author is Head of Wealth Management India, Credit Suisse

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