Expect residential real estate to make a come back: Nitin Jain

‘Commercial real estate might not do as well due to work from home and job losses’

The trend of investing in global markets will pick momentum over a period of time, says the CEO of Edelweiss Global Asset and Wealth Management.

Where do you see better risk reward? Do you think the case for fixed income is stronger or do you think equities look much better on a risk return basis for the next one or two years?

As a wealth manager, we are very clear that most of the alpha in portfolios is created not by being very bold about making big calls or whether to go into equity or fixed income but making more calibrated asset allocation calls and being very selective about what products you choose to play. But generally speaking, I think there is a very big opportunity in fixed income, which is very counterintuitive to all of us because you look at the yields and they are very low. RBI shut its window for 7.75% yield paper and that was a seven-year paper. The reality of life is that for the next two or three years, we are budgeting for a very low inflation and if we are going to go through the contraction, the real interest rate of 7% is very high. Hence, you can think of playing the duration of four to five years in high quality paper.

We have a product called Bharat bonds where we have raised around Rs 14,000-15,000 crore for a lot of PSU firms, which has been a fantastic product for a lot of retail clients. It gives you a yield of around 6.8% today for 10 years. I think those are safe instruments where you are not really taking credit risk but you are taking some kind of a duration risk because structurally the interest rates are going to come down and the yield will be part of the income that you make but you will also make some capital appreciation and we have to start looking at fixed income now as yield plus capital appreciation; so there are good opportunities in fixed income.

For equities,the base has been formed but you can never allocate more than 25% to 30% of your portfolio in equities on a static basis. So it should always be part of the allocation and we think the downside for equities has got capped but the upside right now is very very difficult to guess because the path that this entire Covid crisis takes is uncertain. But I would not be underweight equity for sure but this is not the time to really go bold or overweight equity. So it will be a very balanced portfolio and a lot of your portfolio has to be in fixed income.

In fact I have a feeling that even real estate might make a comeback, which again is very contrarian to what people feel; especially the residential part of the real estate. We think commercial real estate might actually now start to not do as well because of work from home and the impact on the job losses. But the residential real estate has been completely broken for the last seven-eight months and that will come back.

There is one more thing that I would like to share because you are talking about fixed income. I think there is a big opportunity that I see in the fixed income space. I think people have been disappointed with the way the mutual funds have been able to deliver outcomes to clients. In fact, I have a lot of friends there and we run mutual funds ourselves. They are great fund managers and looking at things from the client's point of view, I sometimes feel we have not done a great job on the mutual funds side. I think we are seeing a lot of demand from clients to go direct with the bond market, especially on the high quality papers. There is a lot of activity that has picked up because people are saying we want to be in control and we do not want to be in a situation where we could get stuck in a mutual fund. It is better that we rather keep buying the paper directly and you will see a lot more activity in that space from wealth managers in the coming time.

Is there also a case for diversification towards global markets?
Yes, I think so. Globally, if you see any sophisticated investing population, most people appreciate the concept of global diversification very well and that is why you get allocations to emerging markets, European markets and the US markets. These are all different asset classes in the minds of people. In India, historically because of capital flows constraints, people were not able to allocate money to global assets and the growth in India was very very high; interest rates in India were very high. Hence, people felt the need to work that much harder and find assets offshore. So there are two or three big themes that have happened. One, the LRS has allowed now at least $250,000 per person per annum to go out, which is a reasonable size. The second is some of the mutual funds including us have started to provide a platform to access offshore stocks and bonds directly to clients and what we are witnessing now is a lot of our sophisticated clientele who are the ultra high net worth individuals are actually very keen in at least diversifying the 10% of the portfolio into global assets. We think this will be a trend which will pick momentum over a period of time. We think it will become a very common part of a large part of our clients portfolio; maybe 5-15% as part of the total portfolio.