With Regards To Commodities & Exports, The Outlook Remains Strong Given Global Recovery: Edelweiss Wealth Management

How has the Indian Wealth Management industry responded and adapted to the pandemic? Have you seen more digital adoption in a business that has traditionally been "high touch"?
The past year has been quite sombre with this unprecedented crisis and all businesses & individuals alike have had to adapt meaningfully to it. However, it was remarkable to see the sheer will and resilience of our clients as well as our relationship managers to continue to engage deeply and find investment solutions, despite their inability to physically meet each other.  I believe that every crisis acts as a catalyst for transformation and this is a social change that was most welcome by all of us.

We have also experienced cases where clients who have been acquired over past year have developed a great relationship with their advisors without having met them in person. Digitization for us is not a new concept, as for a long time we have been using technology as an enabler to our business. Irrespective of the pandemic, we have consistently invested in upgrading our platforms which empowers our people and would continue to do so in the years to come.

Have you observed any behavioral changes in the HNI and UHNI segment, broadly speaking? How has your company responded?
Although COVID bought upon us an unprecedented crisis and market volatility, one thing that stood out for clients is that risk management is a critical part of portfolio management. They have become more aware and are trying to understand the inherent risks within their portfolios and benefits of asset allocation, than what we have seen in the past. Their learning curve has been is steep. It has also highlighted the importance of having the right wealth manager on your side and our clients have started to value advice more than ever.

Another definitive trend, which was emerging even earlier and has got further fillip, is the mainstreaming of alternative assets. The fact that the fixed income returns have come down coupled with the overall volatility in the equities space has shaken up people. Clients are actively looking at alternatives where you can probably have lesser volatility and yet deliver better returns than fixed income.  

Our engagement levels with clients have surprisingly gone up and there is a lot more emphasis on long term planning and asset allocation.

Real Estate has seen a decade long bear market. Equities are on what appears to be at irrationally stretched valuations. Is this a good time to convert some financial assets to real assets?
Real estate has shown good traction in the last 6 months at least in the organized segments/higher income segments. The households employed in the organized segments of the economy have seen significant rise in savings in the last one year (job situation has not been impacted much in this segment, while discretionary consumption has taken a hit). At the same time, mortgage rates are at historic low and in select pockets we have seen governments incentivizing home purchases through stamp duty rationalization. All this has worked to revive sentiments in real estate in select pockets of the economy. We do not suggest a structural shift from financial assets to real assets, but we do expect real estate to do well over the next decade.

What's your take on crypto? Manic asset bubble or genuine value proposition?
Crypto like bitcoin etc. have run up quite a bit. As always, it is hard to say whether it is a bubble or not, but one can see where the appeal for the idea of crypto is coming from. After all, bitcoin is a neutral asset unlike fiat currencies or sovereign debt. And this is a world where fiat currencies/sovereign debt is being issued at a pace which has no parallel in history. And safe sovereign debt is yielding negative returns and may continue to do so as reserve currency issuing central banks – Fed, ECB, etc. are forced to bail out their highly indebted governments. Further, crypto offers a decentralized system that bypasses the central banks payments systems; in other words, crypto provides anonymity. That said, cryptos are now catching the attention of the governments and central banks. In this regard, government regulations are clearly an overhang. Governments would like to maintain and control their privilege/monopoly on ‘money’. Any adverse regulation (for example, risk of prohibiting use of crypto on payment platforms etc.) could significantly cloud the outlook for crypto.

How do you see the equity markets shaping up over the next 12-18 months, with the index at such stratospheric earnings multiples? Do you think corporate earnings have a lot of catching up to do?
Indian equities are undoubtedly expensive when seen on absolute PE/PB or market cap to GDP basis. However, valuations need to be judged from cost of capital basis. In today’s world when US 10 yield is offering negative ‘real’ returns, valuations are reasonable. In fact, even the chairman of the US Fed, Jay Powell said that equities valuations relative to cost of capital is at its long-term average (January 2021, FOMC press conference). Further, if one looks at equity valuations relative to EMs or the US, India is trading at its long-term average.

Apart from relative valuations, what is exciting about equities is the revival in earnings momentum. India’s earnings cycle is finally improving with higher commodity prices, better banking profits (as provisioning cycle is peaking) and corporate cost focus aiding profitability. It is worth noting that even in FY21 when Nominal GDP has contracted, Nifty earnings are likely to have grown 20%. Thus, in the overall context of global rates and liquidity, and improving earnings cycle, our view on equity markets remains constructive.

Do you think this vicious current wave of the pandemic is set to damped earnings expectations to an extent?
The second wave is certainly likely to weigh on GDP growth, although impact is unlikely to be anywhere close to what we had seen in first wave. However, the impact of the same on earnings at an aggregate level is unlikely to be much. This is because nearly 80% of earnings are derived from Banks, commodity sectors (metals and energy), and exports (IT, pharma, etc.). While banks will face some challenges on recovery and credit growth, it’s unlikely to weigh much on earnings given that most of the large players are already sitting on large provisions (which was not the case in first wave). Also, we had seen collections and recoveries improve quickly for banking sector once unlocking began. Second, with regards to commodities and exports here the outlook remains strong given the global recovery. While, some of the consumer facing sectors earnings could be impacted, aggregate earnings are likely to remain healthy. Thus, second wave is unlikely to have much impact on overall earnings momentum.

Broadly speaking, what would your words of wisdom be to investors right now?
COVID has changed the economic, financial and investment landscape in many ways and the process is still evolving. It is throwing up its own challenges and opportunities. The intellectual underpinnings of the fiscal/monetary policy making around the world is shifting, consumer habits are changing and ways of doing business, as a result, would also evolve. New businesses are coming up and some old businesses are becoming irrelevant faster than ever. I would not be surprised if 10 years out, 25% of the index might be some of the companies that most of us would not have heard about today. Hence there is a lot of wealth creation opportunity for people who are able to identify those trends and companies early in the cycle.