The Hindu Business Line : Global cues still weak: ASK Wealth Advisors

Our belief is that the equity market, while it has run up, will lose steam in the short term and will give us a very good opportunity to re-invest with a 3-5 year term.

RAJESH SALUJA, CEO, ASK WEALTH ADVISORS

Vidya Bala

Corporate earnings may come under pressure in the third or fourth quarter if the government decides to roll back some part of the stimulus package, says Mr Rajesh Saluja, CEO, ASK Wealth Advisors, a financial planning and wealth advisory firm providing wealth management solutions to individuals and trusts. In an interview with Business Line Mr Saluja talks about the groups’ experience during market turbulence and why he believes that there would be no quick recovery.

Excerpts from the interview:

The year 2008 can be termed as largely a washout for almost every asset class? How did ASK manage that year?

In terms of positive returns, fixed income was one area where one could manage fair market returns. Right up to February 2009, the returns were very good; after the fiscal deficit and the government borrowing programme, interest rates again started stabilising and started moving up. We run a debt PMS, which has given good returns to clients and continues to do so, without any negative returns.

Equity was a challenge. But we got a lot of clients to invest between December 2008 and January 2009. After the October and November dip, the valuations became so attractive, that mature investors with experience in equity investing were willing to look at equities at that point. Those portfolios are doing well. However, in all the new portfolios that we started last year, we were investing in a staggered manner. So, in most portfolios, only 50-60 per cent is invested; 40 per cent is still in cash.

Did the lows of October and March not prompt you to up exposures to equity?

We invested in October as we were 100 per cent sure that the valuations had become very cheap But clients preferred a wait and watch approach, wanting to invest in a staggered manner. So we tried to balance our view with client expectations. When the new Government was announced and the way the market took off, we missed the boat, like everyone else, as it was quite a sharp pull-back. After that, our current view is that valuations are a little stretched. Given the weak monsoons and the fact that the cues are still weak in the global economy, we feel we will get a better opportunity post a correction, as and when it comes.

What led to the strong rally and why do you think the cues are still weak?

There are three factors that come into play for equity investing. First, fundamentals; the second is liquidity and third is sentiment. Sentiment has improved in India and abroad, compared to October-December last year.

Liquidity has also improved; but, then, one has to see the reason for this. One reason is the amount of dollars that have been printed in the international arena. The stimulus packages of governments across the globe, waiver of loans, and saving of financial institutions put more money in the hands of banks, which went ahead and lent the money, leading to increased liquidity. Also, the efforts taken by governments in terms of reducing direct and indirect taxes and spending, the way China did by putting $500-600 million into the system, created more liquidity.

The second thing is that, when interest rates fall so dramatically, then leveraging starts again — you are borrowing in a country like, say, Japan (with zero per cent loan rates) and parking that in other currencies where you can hedge your currency risk and still earn 4-5 per cent. So, liquidity came into the system. One part of the liquidity is government induced, the second is leveraged and the third is also cash that mutual funds, insurance institutions or pension funds were sitting on, which they had withdrawn from the system earlier. Such money has to chase growth, particularly in a domestic consumption-led economy such as India, which is still growing at 5-6 per cent. That is why we saw inflows in February and March and FII net inflows of about $7 billion in 2009.

Now what could be the deterrents? The deterrents could be something like a weak monsoon and its impact on rural incomes. Products or services which are consumption plays could be impacted. At a global level, once the first $1trillion that came into the system was absorbed, you could suddenly see a slowdown in spending in the US; job data have still not improved. So, one has to see whether this stimulus can carry the US economy forward for another 6-12 months or if they will have to put in another round of stimulus.

The global liquidity you were seeing has suddenly slowed down. And corporate results, while they were good, were better because of improvement on the cost front and not top-line improvement. So, revenues have not gone through the roof, except in some companies, and in sectors such as auto. Growth was, therefore, induced by lower commodity prices and interest rates and reduced excise duties.

While the stimulus package was meant to boost a slowing economy, at some point the government will take it back partly — it may increase the excise duty, or increasing the cash reserve ratio (CRR). That’s once again going to put pressure on corporate earnings.

One has, therefore, to watch out for what will happen in the third and fourth quarters. I don’t think it is just going to be a straight recovery. Keeping all this in mind, our belief is that the equity market, while it has run up, will lose steam in the short term and will give us a very good opportunity to re-invest with a 3-5 year term.

Would you recommend investing overseas now?

Sure, about 4-5 per cent. This need not necessarily be in pure equities but could be related to commodities like oil ETFs or gold or gold mining companies and funds that invest in emerging countries. We have been bullish on gold for the last 8-10 months and have bee recommending it as a small part of the portfolio, of course not based on its historical returns but as a hedge. Going forward, given the amount of money that is getting printed, there will be inflation and gold is the best hedge against inflation. Oil and energy is another area. We have been recommending oil when it was at $30-$35.

Also I guess, if one has a slightly longer-term view, some of markets may recover — like the US, which may take one or one-and-a-half years to rebound. You may get some of the businesses at very cheap valuations now, and there is an opportunity in such places.

Similarly, sectors in the energy space in the international arena will be the first to grow when the economy picks up. So, specific opportunities do exist. However, given that India offers great opportunities, only a small portion of the fund needs to be looked at for such investing from a geographic asset allocation perspective. But we wouldn’t go beyond 4-5 per cent.

What are the alternative investment classes you have been recommending?

There are typically three or four alternative investments available in India. There are real estate funds, private equity funds, structured products, gold ETFs, etc. We were recommending these over the last 10 months. In art, we were never looking at recommending any art fund. We were only giving direct art advisory. Yes, it was a tough year for art last year and that segment slowed down.

But alternative asset classes are for someone who has already gone through traditional investments in debt and equity.