IS IT THE RIGHT TIME TO SHIFT TO DEBT

Should investors diversify overseas or stay put with domestic stocks? Is it time to re-balance to debt? How much of your assets should you hold in gold?
Nipun Mehta of SG India Private Banking takes these asset allocation related queries as we head into 2010.

With nearly 24 years of experience spanning various roles in the investment banking and wealth management industry, Mr Mehta is Executive Director & Head – India, SG Private Banking.

With Indian markets at a premium to many developed markets today, is there a case for diversifying overseas now?

This question has two aspects. One, if you look at the emerging markets, a lot of the emerging markets have already moved up over the last eight months or so, some of them much more than Indian markets. Their valuations, when compared to Indian markets, do look reasonably rich.

However, if you look at other global markets, they haven't attracted a huge amount of funds. Uncertainty still exists about the strength, extent and speed of turnaround in those economies. That's why money will continue to stay invested in the domestic markets by Indian investors.

If there are forex flows coming into India from the dollar carry trade that is happening, then there is the expectation that the rupee will appreciate. In that context too there is not a lot of sense in selling investments denominated in the rupee and getting into a currency that may weaken. With both these factors, it makes more sense for investors to invest in the Indian markets.

Are fund flows into India being helped mainly by the currency factor?

No, fundamentals hold the key. Everybody does believe and appreciate the India growth story and that is pulling funds into India.

Are valuations in the Indian markets getting to an uncomfortably high level? Is that not a concern for overseas investors?

To a degree, yes. But if you look at the opportunities available worldwide, there are emerging market equities, commodities, real estate… all of these have seen sizeable appreciation and increased allocations. Even assets like gold and real estate are seeing increased allocation; so equities are not alone.

With respect to Indian equities, there is expectation that over the next few quarters the growth will be good enough to warrant these valuations. However, it is fully understood and appreciated that valuations are rich. Obviously, one part of it is that the valuations are on lower earnings and revised earnings for FY11 may be significantly higher. That could, to a degree, justify this average valuation.

Would you tell clients to tactically cut their equity exposure at this juncture and re-balance in favour of debt?

No, we do not look to have reached that point as yet. However, I do not know if any fund manager is able to correctly call market tops. For instance in October/November 2007, very few managers would have made that call.

However, to take that tactical call to re-balance, debt investments too have to yield reasonable returns. Currently interest rates are at relative lows and it doesn't make sense to lock in investor funds at these kind of low rates. Depending on the liquidity and lock-in period that clients want, we would be recommending debt mutual funds and corporate deposits. However, we are focussing at allocations between liquid and short term bond funds; longer term debt funds are still not in the reckoning.

When do you expect interest rates to start moving up?

In my view, we have at least a quarter or two before interest rates start moving up. The key to that is credit growth and we haven't seen that picking up significantly. Even if higher rates are warranted by higher inflation, in my view that hike can't happen until we see credit growth really picking up.

What is your sense of the property market? Are HNIs showing the appetite to increase their allocations to property?

That is actually quite region-specific. We are seeing a fair interest in real estate at well. Though prices corrected last year, we found that at lower rates transactions were not happening. Maybe a few lower value transactions did happen at lower prices, but high value ones did not take place at much lower price levels. That shows that sellers were able to hold out except where there were distress sales. I think the important thing is that confidence is gradually rebuilding and people are showing interest in real estate.

Is there still sizeable cash on the sidelines with the HNIs after this rally?

Yes, and that's a function of two things. First the level of savings in the economy have shot up significantly over three years from 22-24 per cent in 2006-07 have shot up to 34-36 per cent. That is an indicator of high savings.

The other indicator is the big run up in debt based mutual fund schemes, fixed deposits of banks and corporates. A lot of investments that got out last year are invested in liquid short-term schemes or other liquid assets typically not with a long-term view. That also suggests that a good number of investors have missed out on this rally.

What is your view on gold? Is it good to go