The investment community has been preaching its virtues for years. And diversity, they say, is critical to the success of any portfolio. Nowhere is this truer than in a country with 1.27 billion people, who live in 28 states and speak 22 official languages. Just as India epitomises diversity and plurality, the country’s investment basket offers a plethora of options.
“Diversification is a little like buying insurance. By investing in multiple asset categories — stocks, bonds, cash and real estate to name a few — you are less likely to get hurt if one fares poorly,” asset management group Franklin Templeton’s India homepage states. “In one year, one style typically outperforms the other. It is somewhat like shopping, sometimes there’s nothing better than a bargain and at other times, it’s better to spend a little more for something special.”
But Indian investors, both residents and expatriates, have always preferred some vehicles over others. And while they have a lot of new developments to deal with, they also have a lot to say about them, and act upon.
Volatility equals returns
According to a Global Investor Sentiment Survey conducted earlier this year by Franklin Templeton and global market research agency ORC International, Indians are most enthusiastic about their country’s stock markets among investors from 19 countries. There is no denying that the Indian equity market is currently witnessing much upheaval, but long-term prospects bode well.
After a buying spree of Rs818.7 billion (about Dh50.26 billion) in the first five months of the year, foreign institutional investors (FIIs) sold Indian shares worth nearly Rs63 billion in June. But according to reassuring data from the Securities and Exchange Board of India (Sebi), this is not unprecedented. The month of June has seen FIIs turn into net sellers in 1998, 2000, 2002, 2008 and 2012. In 2008, FIIs sold shares worth Rs100.95 billion.
As if to offset the impact of this outflow, insurance major Life Insurance Corporation of India (LIC) has said it will invest Rs2.5 trillion in the domestic market, of which Rs400 billion will be in equities. “We made an aggregate investment of Rs2.25 trillion last year. This year it will increase by 10 per cent,” S.K. Roy, Chairman, LIC, said last month.
Shrewd investors know that the best way to act in this volatile market is to accumulate stocks that have strong fundamentals and reliable management, while prices are still at attractive levels. Peter Kohli, CEO and Chief Investment Officer at DMS Funds, advises readers in Investor’s Business Daily to take advantage of the depression. “The current volatility will pass and the long-term prospects for growth will remain, albeit with rough patches along the way. While money goes where it’s safest, smart money goes where it has the best prospects for long-term growth,” he says.
Rebound around the corner
Three senior BlackRock Investment executives sum up the common belief that Indian stocks are destined for a rebound in their June report, When the Elephant Gets Sick: India at a Crossroads. They say: “Those willing to look beyond the near future could be rewarded. Indian shares could rally 10–15 per cent over the next 18 months, we believe. The past is never a perfect guide to the future, but it does provide a hint of what can happen. The Indian stock market almost doubled between May 2009 and July 2009. We are not tipping something similar, but anticipate a sizeable upswing from current levels nonetheless.”
The Indian equity market, ranked second only to the US, has more than 7,000 listed companies, of which more than 150 stocks have market capitalisation of more than $1 billion.
In comparison to other emerging markets, this diversity allows for exposure to a wide range of sectors. The National Stock Exchange is India’s leading stock exchange, with more than 1,300 companies listed on it representing the length and breadth of the Indian economy.
The Bombay Stock Exchange, established in 1875 as the first stock exchange in Asia, has more than 5,000 companies listed, making it the world’s largest in terms of listed members. Companies listed here commanded a total market capitalisation of $1.32 trillion as of January this year.
The argument for gold
Reuters recently reported that although “current account deficit” is among the top searches from India this year on Google Trends, the addition of the word “gold” as a comparative keyword is far higher.
The Indian government and the Reserve Bank of India (RBI) have taken many steps this year to curb the insatiable demand for gold, in a bid to contain India’s widening current account deficit. These include raising the import duty and tightening financing norms.
The Gold Prices India website says that while gold exchange-traded funds (ETFs) have seen redemptions since February, the total year-to-date outflow, which stands at Rs2.6 billion, is quite moderate compared to 2012’s inflows of Rs18.26 billion. Notably, almost 80 per cent of these redemptions also happened in June, because of profit booking amidst concerns of a further decline in gold prices.
Analysts say the US Federal Reserve’s plan to taper its quantitative easing (QE) programme contributed to the sell-off in gold funds, and that gold prices in the near term will remain hostage to incremental positive data from the US. Meanwhile, data released by the Association of Mutual Funds in India shows assets under management of gold ETFs at Rs96.12 billion in June as being down 20 per cent from their January peak of Rs120.57 billion.
In the same month though, Geoff Lewis, Executive Director and Global Market Strategist at JP Morgan Asset Management, propagated the place of gold in Indian investments. He explains in an interview with Business Standard how gold is a complex but solid investment. “Apart from being a market-driven asset, it has consumer demand. Prices are affected by retail demand and gold’s store of value status in India. It is unlikely to give double-digit returns but won’t collapse. There is a floor between $800 and $1,100 an ounce (Rs15,500-21,000 per ten grams). It deserves a place in portfolios in uncertain times,” he says.
Frank Holmes, CEO of investment management firm US Global Investors, has written widely on Indian investments, especially gold, and these are his rules: “Don’t try to get rich with gold because the corresponding risk is simply too high. Limit your exposure to gold as an asset class to 10 per cent of your portfolio — that is, no more than 5 per cent in bullion and 5 per cent in gold equities. Rebalance each year to keep that level of exposure and use volatility to your advantage.”
Lure of Indian real estate
According to Cushman & Wakefield’s report, International Investment Atlas, India is among the top 20 real estate investment markets in the world, with an investment volume of Rs190 billion recorded in 2012.
Indian realty is seeing a new trend where large sovereign wealth funds are diversifying away from traditional developed markets such as Europe. In early July, Oman’s State General Reserve Fund, the Government of Singapore Investment Corporation and Temasek committed to investing $200 million (about Dh734.6 million) in a real estate fund run by India’s biggest mortgage lender, the Housing Development Finance Corporation. In mid-July, Reuters reported that the Abu Dhabi Investment Authority will invest approximately $200 million in Indian real estate and have the Kotak Realty Fund invest the money.
The recent fall in the value of the Indian rupee has triggered a switch in focus towards properties in India among non-resident Indians (NRIs), especially among those in the Middle East. Last month, Ashutosh Limaye, Head of Research & REIS at Jones Lang LaSalle India, spelled it out in his blog. “A simple back-of-envelope calculation suggests that if a Dubai-based NRI invests Dh10 million in Indian real estate now (rupee/dirham at 16.4), and assuming only conservative > returns of 15 per cent from Indian real estate in the near-term, the investor can expect repatriated returns of more than 27 per cent, assuming that the rupee returns to its pre-May mean of 14.8/dirham.”
The case for NRI bonds
In late July, India attracted Rs259.05 billion worth of orders from foreign investors during an auction of government debt limits, higher than the Rs236.61 billion rupees on offer. Many experts think an NRI bond issue is on the cards.
HSBC country head Naina Lal Kidwai, who is also President of the Federation of Indian Chambers of Commerce and Industry, told PTI in a recent interview that it is a likely tool to stem the fall of the rupee, as demonstrated in 1991, 1998 and 2001. “The government has used it in the past, and knows what works and what does not,” she said.
India Development Bonds raised $1.6 billion in 1991, Resurgent India Bonds raised $4.2 billion in 1998 and India Millennium Deposits raised $5.5 billion in 2000. According to conservative estimates, India can mop up $20 billion from a new NRI bond.
Bloomberg reported in July that India is considering selling sovereign bonds for the first time. But according to a more recent Reuters report, officials said India was wary of sending any distress signals to international markets. “Issuing a global bond might send such a signal, so instead policymakers will focus on attracting funds from Indians living abroad, such as by raising deposit rates in India or issuing bonds specifically designed for them,” the report says.
RBI data reveals that NRI flows into India in April-May, 2013-14 have nearly halved compared to the previous year — $2.8 billion in April-May 2013-14 compared to $4.8 billion in the corresponding period last year. Under these circumstances, an issue of NRI bonds will fill this gap only if it is at a higher rate of interest than what is otherwise deemed normal, say experts.
Cash is still virtuous
Last year, the RBI raised the number of transactions an individual can benefit from for external money transfers from 12 to 30 per year. The cap on a single transaction was also raised to $2,500. This move has allowed NRIs to send more money home.
Recent media reports in the Middle East suggest that several NRIs took loans in their country of residence to repatriate money to India, just to avail of the favourable exchange rate in June. Now, if the RBI accedes to a request from banks to offer shorter tenure deposits, NRIs will be able to take advantage of much higher interest rates in India. Bank chiefs attending a recent meeting said this will also encourage dollar inflows into the country.
