Earnings cycle bottomed out in FY17, double-digit growth now possible: ASK Wealth CEO

Investors should look for opportunities at short to medium term of the yield curve focusing on accrual strategy and building yield in their portfolio.

Rajesh Saluja

MD & CEO | ASK Wealth Advisors

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Will equities continue their upward journey or is it time to look elsewhere? Many investors are confused. In the backdrop of poor performance by other asset classes such as bonds, gold and real estate, rising stock markets have made many ignore anaemic corporate earnings growth and rising volatility.

Rajesh Saluja, MD & CEO of ASK Wealth sees high likelihood of double-digit earnings growth over the next few years aided by a low base and recovery in growth. In an email interaction with Moneycontrol, Saluja expressed his views on various investment opportunities.

Q. Nifty at 10000 is seen as a peak by many equity investors. How do you see the investment prospects of stocks going forward? How should investors tap this asset class?

A: Given the favorable macro and liquidity backdrop, equities remains the most preferred asset class for an HNI investor despite skepticism over near term performance given rich valuations. Firstly, the earnings cycle has bottomed out in FY17, with the high likelihood of double digit earnings growth over the next few years aided by a low base and recovery in growth. Secondly, new equity opportunities are arising with greater formalization and value migration post GST and demonetization. Thirdly, FII flows would continue to be strong in a global reflationary environment with India still a bastion of macroeconomic stability. Lastly, falling interest rates and lower inflation is causing a structural shift into financials assets with bulk of domestic flows into equities. Mutual fund annual SIP book is now upwards of USD 10 billion, acting as a strong stabilising factor for liquidity.

We remain growth believers and continue to see equities as the best asset class over the long term. Investors should stick with bottom up stock picking and domestic themes which would continue to deliver superior returns over 3-5 years. The right equity strategy would be higher allocation to large cap and PMS focusing on investing in companies with resilient earnings growth and strong balance sheet.

Q. Have the interest rates bottomed out in India? How should investors align their fixed income portfolios?

A: On the fixed income side, recent inflation trends confirm the bottoming of prices. With risks to inflation rising coupled with rising fiscal slippage and weakening of external parameters in a scenario where global interest rate cycle is turning up, we are likely close to the bottom of the rate easing cycle. However, RBI’s inflation targeting framework coupled with government reforms should keep inflation within RBI’s target range of 2%-6% resulting in interest rates close to current levels for an extended period of time.

HNI investors should look for opportunities at short to medium term of the yield curve focusing on accrual strategy and building yield in their portfolio as incremental returns in duration is likely to be measured. Opportunities are also rising in credits given faster pace of stressed asset resolution.

Q. Alternative investment fund and REIT are much talked about, especially when one seeks diversification. What should investors expect from these two investment vehicles?

A: Since their introduction, AIF’s have witnessed tremendous investor interest due to the diverse investment strategies that these funds can execute. AIF’s enable investors diversification in the form three distinctive categories with Category I AIF’s covering early stage, start-up funds, SME and infrastructure funds that mainly invest in unlisted equity of entities that have positive spill-over effects on economy for which certain incentives or concessions are given. Category II AIF’s cover other private equity, real estate and debt funds that primarily invest in unlisted equity of entities for which no specific incentives or concessions are given by the government. The final Category III AIF’s cover the residual strategies i.e. funds that invest in listed securities with or without engaging in leverage and other funds that employ diverse or complex trading through investment in listed or unlisted derivatives. Assets under management in AIF’s have ballooned to INR 96,000 crores as of June 30, 2017 and is expected to rise further.

The Real Estate Investment Trusts or REIT’s framework on the other hand were introduced by SEBI in 2014. However, due to the stringent guidelines, REIT’s have failed to take off with only one REIT currently registered with SEBI. HNI’s are increasingly making selective real estate bets through the Alternative Investment Fund (AIF) route over direct investment.

Q. Structured products have made a strong come back in the past two years. How would you advise investors while choosing them?

A: Structured product issuances have tripled in the last 2 years due to increase in market volatility. Structured product investors are opting for principal protected structured product where upside participation is present along with downside principal protection option. It is an excellent tool to hedge an investor portfolio that too with principal protection. Most of the investors are going non- conventional underlying like government securities, stocks and commodities.

Structured product are bespoke products that can be customized as per investor portfolio and view. These products offer investors different levels of exposure, risk, return and protection, and act as a valuable portfolio return enhancement tool. Investors should give certain allocation to structured products to create alpha.

Q. Gold has got investors’ attention after the rise in geo-political tensions. What is your view on gold? Should investors look at tactical allocation to gold?