What’s on the horizon for High Net Worth investors?

Market Outlook

The pandemic’s second wave has raised questions about the strength and timing of India’s post-COVID-19 economic recovery. Growth forecasts have been slashed and sentiment was shaken.

The World Bank forecasts FY22 growth at 8.3% while the Reserve Bank of India has cut growth projections by 100 bps to 9.5%. The economic pain has forced all investors to review strategies on how to preserve and grow their capital.

Many High Net Worth Individuals (HNWIs) have stayed invested in equities

Today, we live in a world that is characterized by high geopolitical risk and low-interest rates, with rising inflation pegging back real interest rates into negative territory.

This largely explains why, during the pandemic, HNWIs mostly stayed away from traditional fixed income products such as fixed deposits and bonds, while occasionally favoring structured products such as market-linked debentures.

Equities remained the preferred destination for many, unsurprising since this asset class has yielded double-digit returns over the past 10-15 years, better than any other.

And given the Reserve Bank of India’s likely continuance of a softer interest rate regime, equity investments could reasonably retain a key share of the HNWI asset mix. And here, there seems to be a clear preference for quality stocks with resilience and pricing power and sectors that could emerge relatively unscathed from the pandemic.

These businesses should continue to gain market share as more business flows in favour of the organized players, a trend that started post demonetization in 2016, GST rollout in 2017, the latest credit crisis that started with IL&FS in 2018-2019 and got accelerated during the pandemic.

Gold is another asset class that has found favor. Though asset mixes differ, today, gold is an integral part of a typical HNWI’s portfolio. Holding gold also has the effect of beating back inflation and rupee depreciation.

Real estate’s systemic weaknesses – large loan defaults – continue to unnerve investors, alongside activist regulation (RERA).

The hope is that a ‘goldilocks’ scenario of easier credit and affordable prices will lift the sector, led by residential housing in a post-Covid-19 revival encouraged by the wider acceptance of working from home.

Many analysts see a bottoming out of this sector on the horizon. By April 2021, for instance, the average residential inventory had almost halved to 18 months from a peak of 34 months in 2016, indicating a clear demand pick up and improvement in the overall business sentiment.

Legacy planning and other key trends emerging out of the pandemic

The pandemic has strengthened a trend for structuring family wealth and succession planning. This is not new, of course, but the sheer number of enquiries and legacy planning advisories suggests that one of the pandemic’s unintended consequences is more active thinking on the legacy.

Diversification of asset classes

The other key trend has been diversification towards dollar assets, especially foreign equities, given attractive returns and potential currency gains on repatriation.

There has been a lot of talk around HNWIs leveraging their financial clout to migrate overseas but in our view, the current penchant for overseas assets has been more a reflection of their need to diversify their portfolios, rather than to relocate.

The post pandemic landscape for HNWIs

So, what does the landscape look like from an HNWI lens? It is self-evident that technology enablement will play a fundamental role in the post-Covid-19 economy.

During the pandemic, platform-based micro-economies around learning (edtech), financial services (fintech), services (deliverytech), remote caring (healthtech) all took hold, aggressively and of necessity.

Post the pandemic, global capital has flooded into these opportunities, consolidating structural changes that already made the economy feel different, and giving a clear picture of investor sentiment. Public listing of many of these ‘unicorns’ will extend this renaissance of capital and entrepreneurship.

The wealth management industry itself has an important role to play as HNW investors increasingly require more nuanced and bespoke solutions.

Personal relationships, trust, and in-person interactions will continue to be critical in what remains a relationship industry.

(The author is Investment Director, Barclays Private Bank)

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