'Growth is not getting translated into participation in markets'

Q&A: Nipun Mehta, Executive Director & Head SG Private Banking India

Stock markets have turned around one year after the financial crisis intensified with the collapse of Lehman Brothers. But high net worth individuals (HNIs) are still wary of raising their exposure to equity. Nipun Mehta, executive director and head, SG Private Banking India, talks about the investment scenario with Sudeep Jain and Abhijit Lele. Excerpts:

It is almost one year since the financial crisis intensified. What is the investor mindset now compared to 12-18 months ago?
In the last 18-24 months, investors have gone into a defensive mindset. All of us talk about cash remaining on the sidelines, which is reflected in the high savings rate of 36-37 per cent compared with 22-23 per cent in 2006.

Although confidence is high, entry by investors into markets is not happening. There is confidence that the Indian growth story continues, but that is not getting translated into participation in the markets.

What are people investing into?
Money has been essentially flowing into fixed-return schemes, liquid funds, short-term funds and hybrid schemes which have a greater exposure to fixed income instruments and lesser exposure to equities. A lot of people are also investing in gold.

Are you still advising people to invest in gold?
At these levels, we are not necessarily advising people to invest in gold. But a lot of investors still want to invest based on their perception of where gold will be three-six months down the line. So, people are more comfortable with gold and fixed-return schemes and averse to equities.

What is required for a shift from fixed income to equities?
Markets remaining at a reasonable level for a given period and absence of negative news will give investors confidence that there will not be a crash. Valuations will catch up with time. But you need markets to stay at a particular level. And that stability and range-bound factor will give investors confidence.

Have different profiles of investors reacted to the situation in different ways?
It will not be very different. The risk aversion would be similar. The difference is in the high net worth individual (HNI) segments, where generation of surplus funds will happen. This would not necessarily happen in the retail or mass affluent segment because some of the investors would have lost jobs or would have been dependent on portfolio churn. If their portfolio is negative, they will not participate until it turns positive.

Is there more interest in alternative asset classes?
If you look at alternative assets, we saw real estate funds come in at the peak in 2006-07. Some of them are now negative. We have seen art funds come in. They are today virtually nowhere. We also saw a lot of structured products and most of them are maturing in 2009 or 2010. They are getting capital back because they were capital-protected. But they have not given good returns.

Essentially, these alternate classes did not necessarily make too much money.

Inroads into commodities have been relatively limited. There could have been two ways that an investor could have benefited from commodities.

One is through mutual funds which invest in commodity companies. The other is through commodity exchanges. But due to the fact that there are delivery compulsions and commodities are volatile, HNIs have been able to get only limited benefit of commodities.

Is there investor appetite for off-shore investments given that investors can invest up to $200,000 per year abroad?
That window could have been exploited better when the rupee was depreciating against the dollar. But now that the rupee is appreciating against the dollar, investors do not want to buy in a weakening currency because they have to make enough returns to cover currency losses.

How big is your team at present and by how much do you plan to increase it?
We have 45 people right now in Mumbai and New Delhi and will expand gradually. The industry is expanding, wealth in India is expanding, and private banks will grow in a corresponding manner. Assets are getting managed more professionally and in a more disciplined manner.