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What asset classes other than listed equities are promising for the Indian HNIs?
Estimates based on studies of Global Developer Market, the asset allocation of high networth individuals (HNIs) shows that India represents 1-3% of their total allocation. Naturally, the global HNIs have access to the world’s most sophisticated asset allocation advice. Asian emerging markets being perceived as risky, as well as holding a relatively smaller proportion of the global markets, get a lower allocation, about 10%. India being about 10% of the Asian emerging markets gets 1%.
As opposed to this, the Indian HNIs are nearly 100% allocated to the Indian markets.
HNIs worldwide tend to have similar consumption behaviours. They tend to travel to the same locations, buy the same set of luxury brands, send their children to get educated in the same set of colleges and get their health care services from the same health centres worldwide. Then, how are Indian HNIs so different in their investment patterns?
A few potential hypotheses can be established.
This is possibly a legacy of the capital controls that existed for long in India. This made it impossible to replicate the global strategic asset allocation models. Further, Indian HNIs’ wealth was traditionally attached to hard assets, such as real estate and gold; and these, typically, tend to be easier to manage in the home markets. Plus, the Indian equities market was reasonably diversified and providing strong returns in the long term.
But with more than a decade of reduction of capital controls, this legacy asset allocation requires a change. It is timely as well since the traditional favourite of Indian HNIs, real estate, has been stagnant in terms of returns. This doesn’t deny that pockets might remain lucrative. But the seemingly easy, traditional model of buying luxury residences or plots of land and selling them after a few years at a significant profit seems to be on the decline.
The other traditional favourite is gold. Gold again has been proving to be a difficult bet for the past couple of years. Since it is not a yielding asset, it is favoured in times of volatility and inflation as a vehicle to preserve capital. Since everyone chases gold under such circumstances, it seems like a capital appreciation asset class for a few years. Indian HNIs will continue buying gold but more as a traditional habit, knowing well that large appreciations are unlikely, except when political and economic uncertainties arise.
Fixed income yields have been dropping and are now at a level lower than the long-run inflation. They will probably go back to just above inflation at about 7-8% pre-tax. Post-tax returns are likely to remain below inflation and not preserve purchasing power.
Alternative asset classes, such as private equity, venture capital and angel investing, have been disappointing so far for Indian HNIs; although, there might be exceptions. Category III Alternative Investment Funds (hedge funds) have been operational for too short a time but there is promise.
Under such circumstances, what asset classes other than listed equities are promising for the Indian HNIs? Isn’t it time to diversify beyond the Indian markets?
From a strategic asset allocation perspective as well, the global developed markets are nearly 75-80% of world markets. These are economies that are developed and operate very differently. Their inflation rates, employment rates and growth rates are different. Their central banks’ policies are different and the currencies are more stable. The companies listed on their capital markets are larger and have major exposure to the developed markets and a significant, though minor, exposure to several other emerging markets. They have primarily dollar-denominated sales (or in other hard currencies, such as euro, pound or yen). Further, the profitability and valuations of these companies are also different and dependent on other factors as compared to Indian listed firms.
The developed capital markets are also less correlated with the Indian capital markets in the medium term. There may be years when S&P 500 gives positive returns and Nifty 50 gives negative returns, or vice versa. This provides significant diversification benefits. This is especially true in times of domestic crises or emerging market crises. Sometimes, the Indian capital markets and/or currency will fall in sympathy with other emerging markets even though there is no domestic crisis in India. At such times, typically termed “risk-off periods”, an exposure to developed markets provides stability to the Indian HNI portfolios.
Besides strategic diversification purposes, there is another reason to take exposure to thematic asset allocation to emerging sectors in exponential growth. These provide an exposure similar to venture capital, i.e., high-risk, high-return, but within the listed equities space and hence highly liquid. The exponential growth themes can be a result of various thematic triggers—social, technological, political, economic, legal or environmental. Any of these trends can catalyse an investment theme, although technology is the most frequent one. Typically, these themes are absent from the Indian listed space.
In 2002, Google was not listed, Facebook was yet to be born, and Apple was valued at $7 billion. Today, the combined market cap of just these three companies is about $1.7 trillion, which is similar to the market cap of the Indian stock market.
It is time for Indian HNIs to broaden their mindset from global consumption to global investing as well.
Vikas Gupta is chief executive officer and chief investment strategist, OmniScience Capital