INVESTMENT TRENDS

INVESTMENT TRENDS
Despite global economy blues, 2012 signalled a return to wealth creation
The recovery in the US economy, combined with expectations of a gradual pick-up in global growth and a highly expansionary monetary policy in most developed countries combined to reduce risk aversion across most asset classes. Returns from most asset classes either went up or were stable in 2012, and this encouraging trend continued in the first quarter of 2013 in most markets. In fact, even though income growth was slower due to subdued economic growth in most countries and weak demand (that hurt businesses), wealth creation continued unabated during the year because returns from almost all asset classes were attractive be it equities, bonds or commodities. The pick-up in wealth creation in 2012 was illustrated by the nearly 16 per cent increase in the combined net worth of the billionaires in the Forbes List 2013. It was quite a contrast to the previous year, when the combined net worth (Forbes Billionaires 2012) grew by a mere 2 per cent, one of the slowest in the past few years. Moreover, the number of gainers in the Forbes List 2013 was four times that of the number of losers, compared with an equal number of winners and losers the previous year. Much of this change was due to the performance of various asset classes. Global equity markets fared well. The Indian market shrugged off its dismal performance in 2011 and was one of the best global performers in 2012, with the Sensex returning 26 per cent and the Nifty 28 per cent. Other Asian markets too did well in 2012; both the Hang Seng and the Nikkei gave nearly 23 per cent returns. In the US, the Dow gave 8 per cent and the Nasdaq 16 per cent. On a yearly basis, bond yield in global bond markets have been fairly stable for the past few years, and that trend has continued. In 2012, the average yield on the US 10-year g-sec was 1.9 per cent, close to the previous years average. In India, the average yield on the 10-year g-sec was 8.1 per cent, nearly the same as the previous year.
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Real estate prices were generally stable with an upward bias in all major territories including India in 2012. Gold and silver too gave around 13 per cent returns in India. The price of gold corrected sharply in the early months of 2013, but domestic prices have been stable for the past month or so.

Investment trends in 2012

The key source of wealth continues to be success in primary business, followed by real estate and investment in equity. This year, many respondents also identified income from sale of business as a major income-earner, but this appears to be only a one-off phenomenon, perhaps indicating that some ultra HNIs have chosen this period to exit unfavourable businesses. Both the Inheritor and the Self-made asserted that the bulk of their wealth came from income from primary business and real estate (also inheritance, in the case of the Inheritor), whereas the Professional indicated that the biggest contribution was from equity. The Professional appears to be far more confident in his ability to generate returns even from a lacklustre market. His propensity to take greater risks in the market is also because he is generally highly educated, and has the experience and expertise to understand the stock market better than many others.

SOURCES OF WEALTH

Success in primary business

Success in primary business Real estate Equity Sale of business Others

Real estate

40.4%

14.7%

7.5%

12.8%
Equity

24.6%

Sale of business

Others

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Although the economic climate remains subdued and businesses are still hurting due to low consumer confidence and weak demand, there has been an increase in the money ploughed back by both Inheritors and Self-made into their primary business (over 30 per cent in 2012 compared with around 24 per cent in 2011).

Unlike last year, a majority of the respondents said that they had ploughed back over 30 per cent of their income into their primary business, indicating a slight improvement in business confidence compared to last year. Compared to last year, therefore, investment towards growing personal wealth declined in 2012 while allocation to savings and charity either remained the same or went up marginally.

INCOME ALLOCATION

Expenses

Investment into primary business

Investment for growing personal wealth

Savings

Charity

Others

29.1%
28.3%

31.2%
24.2%

16.0%

15.7%

24.1%

16.3%

5.4% 4.4%

2.6% 2.7%

2012

2011

Despite the marginal improvement in business confidence, many still did not feel confident enough about the economic climate. Therefore, low-risk and capital protection continued to be catchall phrases pertaining to approach to investments this year too. Low-risk instruments such as fixed deposits continued to be popular with ultra HNIs.

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APPROACH TOWARDS INVESTMENTS

25.4%

74.6%
Self-made

29.8%

70.2%
Inheritor

41.2%

58.8%

Opportunistic

Professionals

Disciplined / Balanced

28.9%

71.1%

Overall ultra HNI

During a period of volatility, the foremost consideration behind investment (including, perhaps, tax planning aspects) is regular income and protection for the future; growth is a secondary concern. This is quite unlike the thinking in business where growth and profits, and not protection is the chief objective. Nearly 60 per cent of the Professionals and over 70 per cent of both Inheritors and Self-made said that they are following a disciplined approach to investments. There were also some interesting regional differences. Among the metros, ultra HNIs in Mumbai and Delhi were highly risk-averse compared with those in Kolkata and Chennai. Among non-metros, a high percentage of our respondents (nearly 50 per cent) in Ahmedabad and Lucknow followed an opportunistic

approach despite the volatile market conditions. While equity markets have given better returns, we are being cautious in planning our investments; real estate continues to be my favourite, one respondent stated. Last year, we found that younger, established ultra HNIs (in the 31-40 age group) were more opportunistic than the older ones, who focussed more on capital protection and adopted a disciplined approach. With discipline and caution continuing to rule the roost, many ultra HNIs preferred to adopt a long-term approach to investments rather than a short-term one that is more characteristic of an opportunistic investor.

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Risk aversion came down a little compared with last year but capital protection still remained paramount. The last two years or so, my approach has been defensive. The emphasis has been on capital preservation than super-normal growth. There is no chasing of equities but investing only when seen some value, one ultra HNI remarked.

Real estate continued to be popular this year also, along with debt. The Professional invested the most in stocks and shares, followed closely by fixed deposits and then real estate. Real estate investments have always delivered good returns in India, so it is generally perceived to be an attractive medium-risk investment and this is indicated by data through all the three years.

2012

CHANGE IN INVESTMENT PORTFOLIO

2011

4.0%
Alternate Assets

7.0%

29.0%
Real Estate

30.0%

32.0%
Debt

29.0%

35.0%
Equity

34.0%

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Gold / silver investments remain popular and a healthy proportion of the total portfolio continues to be invested in these two precious metals. Highly risky avenues such as derivatives, hedge funds and structured products are still a no-no with ultra HNIs. Perhaps the experience with these products (some of which are highly complex) in 2008, mostly in the developed markets, is still too close to be forgotten. Art as an investment continues to languish; this year, the percentage of ultra HNIs who said that they had invested in art was lower than last year. Ultra HNIs are continuing a similar approach because many of them now believe that the economy is unlikely to recover before the endof 2014. Taken together, these trends indicate a gradual improvement in business confidence and increased risk aversion. In a volatile market, fixed deposits, cash and gold / silver are seen as low risk. Real estate, ULIPs/insurance, mutual funds, PMS schemes, commodities, bonds and debentures are medium risk whereas equities, currency, derivatives and hedge funds are generally perceived to be high risk. Due to the focus on capital preservation, most ultra HNIs like to retain close control over their assets and their portfolio management. This is particularly true of assets that they comprehend, such as real estate, derivatives, stocks and shares etc. On the other hand, they are likely to take help from experts on assets that they did not understand; it so happens that most of these assets in this category are also high risk such as hedge funds, currency and art, and are therefore less invested into. The improvement in wealth was also reflected in contribution to charity. After declining last year in percentage terms, contribution to charity bounced back this year. The percentage of income that has gone towards charity/philanthropic activity among Indias wealthy has gone up (5.4 per cent in 2012 versus 4.4 per cent in 2011). Clearly, the well-publicised drive by a globally renowned billionaire to get the wealthy to donate substantially to charity appears to be getting attention. One of the first in India to respond to this call was an IT czar, who announced that he had already transferred a portion of his

wealth to charity. Since then, a few other Indian ultra HNIs including the promoter of a South India-based real estate company have announced that they will transfer up to 50 per cent of their wealth to support philanthropic activity. So, what will 2013 be like? Well, for one, risk aversion is likely to decrease in 2013. As the economic climate improves further, indications are that ultra HNIs will reduce their exposure to debt (primary fixed deposits) and increase their investments in real estate next year. Inheritors and Self-made also noted that they will increase their investments into their businesses. For wealth managers in India, the current period is only a temporary lull in an otherwise bright future. Once the economy comes back on track and the investment pie grows, opportunities will continue to unfold for domestic wealth managers. The number of ultra HNHs is expected to more than triple over the next 5 years. The current period can be used by wealth managers to improve their networking, develop more products suitable for the Indian market and identify the right clients so that they will be ready to move when the market turns hot once again.

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