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US politics will decide direction of the world markets

Business Standard, Apr 7, 2017

By Ashley Coutinho.

Shiv Gupta, founder and chief executive officer, Sanctum Wealth Management

Investors from abroad are acknowledging India’s shift towards structural reforms and macro prudence, says SHIV GUPTA, founder and chief executive officer, Sanctum Wealth Management. In an interview with Ashley Coutinho, he says emerging markets’ valuations are not extreme and the demography-driven structural opportunities in countries like India, Indonesia and the Philippines remain attractive.

The market has rallied 17 per cent in the past year, despite events such as Brexit, Donald Trump’s surprise win and demonetisation. Is there a correction round the corner? What are the global cues to watch out for in 2017?

The Indian market has taken these events in its stride, a testament to its overall attractiveness and to the idea that we are in a secular bull run. Looking ahead, the course of US politics is likely to determine the direction of both fiscal and monetary policy, and have a knock-on effect on much of the world’s markets. We believe the market has been underestimating the difficulty Trump would have in rolling out his initiatives and is overly sanguine about prospects for a large fiscal stimulus. Further, we expect the benefits to become apparent with a considerable lag. The road is more uphill than investors are anticipating. Back home, in the near term, the market will be driven by domestic earnings, rollout of GST (the goods and services tax), government spending and reforms, and rate transmission to businesses and consumers.

Foreign institutional investors (FIIs) have come back to the market in 2017, after a heavy bout of selling in the last quarter of 2016. How do you see FIIs allocating money to Indian markets in 2017?

The exit by FIIs was a knee-jerk reaction after the Trump victory in America. From a long-term perspective, FIIs (foreign institutional investors) acknowledge India’s shift from earlier decades of macro policy imprudence and lumbering political intent to a more growth-led approach, predicated on structural reforms and macro prudence. This makes India a more attractive investment case. While it’s difficult to predict the extent of flows, incremental allocation will be based on confidence in the continued progress of growth-enabling reforms and global cues, particularly from the US.

How do you see the year for emerging markets (EMs)?

Emerging markets, while positive, have massively underperformed developed markets over several years, driven by the US Fed (their central bank) taking interest rates to effectively zero on the short end, allowing US valuations to expand to stratospheric levels. While the valuations appear rich almost anywhere, adjusted for lower interest rates, EMs’ valuations are not extreme, and the structural opportunities driven by demographics alone in countries like India, Indonesia and Philippines are very attractive.

Which sectors are you overweight and underweight on?

We remain bullish on select areas within financials, automobiles, consumer discretionary and energy. In terms of infrastructure, we prefer upstream providers of infra build-out, as well as players that are positioned to benefit from recoveries in affordable housing and consumption demand. We are underweight on telecom and information technology.

Will domestic institutions continue their buying spree in calendar year 2017? How are high net worth individuals viewing the market at this point?

We expect domestic institutional investor (DII) flows to not only remain but strengthen, as a larger proportion of incremental savings is channeled into financial assets. As far as HNI (high net worth) clients are concerned, their portfolios usually contain a mix of equities, fixed income and alternatives, based on their individual profiles. Within this, we have seen relative allocation to equities increasing, often through thematic PMS (portfolio management services) strategies.

We are also seeing considerable interest in alternative investments, reflected in new AIF (alternative investment fund) launches. However, as an asset class, it still represents a relatively small proportion of the market portfolio. We also see growing interest in leveraged capital market products, as also across a range of real estate opportunities arising from the cross-currents created by demonetisation, RERA (the new law on better accountability in the sector) and REIT (real estate investment trusts) regulations.

What is the outlook for the wealth management sector in India?

The secular growth of the Indian economy will continue to result in significant wealth creation, far outstripping that in many other parts of the world. The segment is at an inflection point, with players trying to acquire scale. We have been a year in the business and are largely done with core platform construction. In the coming months, we will augment our product platform, work on developing an international capability and grow digitally.