Outlook Business (OB): Welcome to the 9th Outlook Business annual private wealth roundtable. While the pandemic has impacted the world in more ways than one, a look at the stock market seems to suggest that it is business as usual. How much of that is irrational exuberance and how much of it is justified?
Yatin Shah, Executive Director, IIFL Wealth: For the first time, we have seen three crises bundled in one – economic, humanitarian and financial. So, there is no playbook. The US Fed does not want a financial crisis, and for that reason, asset prices have been kept high through low rates and excess liquidity. Much of that liquidity has found its way to emerging markets. Going into next year, we are focused on three things: one is risk appetite which drives asset allocation, second is valuation of various assets, and the third is interim return, because for the first time in 20 years, savings bank rate is higher than the return generated by liquid funds.
OB: Yatin, do you think we can head higher from here or are we in bubble territory?
There is strong correlation between risk-free rate and valuation in equities, and if the cost of capital comes down, the P/E ratio expands. Investors are now attuned to a ‘new normal’ because it has been almost a decade or so that central bankers have kept rates low. So, I would not bet against it. You might look at the P/E band of Nifty for the past 20 years and feel we are in an overvaluation zone. But, index weightages have changed from industrial manufacturing, oil and gas, and banking that were guzzlers of capital, to getting overweight with technology, pharmaceuticals and FMCG which don’t need capital, have high cash flows and zero debt. Hence, you can’t say that 20-year Nifty P/E was 16-18x, and therefore, it is now overvalued.
OB: How are you approaching real estate?
I don’t see many of my clients wanting to own commercial standalone units, which they thought was a good thing — own an office and earn rent on it. They are happy to earn 7% post-tax dividend yield and capital appreciation of 3-4% through REITs. We have started with10%, for most portfolios, whether it is conservative, moderate or aggressive. We have gone at least 10% into REITs because there is nothing left in fixed income.
OB: Are you erring on the side of caution?
We like hold-to-maturity products. We don’t play credit bucket in mutual funds and we did not have a single rupee in Templeton MF, not because we expected that Templeton will face liquidity challenges, but because the strategy had ALM mismatch. Investors can redeem next day, but you are lending for three to seven years. With hold-to-maturity products, all investors exit together after two or three years, which is not the credit strategy in open-ended credit funds.
OB: What should one expect in terms of return over the next year?
We also see a lot of opportunity in alternatives. India has over $40 billion worth of unicorns, and most clients don’t have access to it. We are launching a technology fund which is going to be pre-IPO and growth companies, where we get to participate in the India tech story. Investors are underexposed and we want to take that allocation to 10-20% of the portfolio. REITs is another big opportunity. The third is asset-backed credit funds, be it promoter shares or real estate. It is seeing 12-16%return because mutual funds and NBFCs have vacated this space.