“The new generation of wealthy are the ones open to using wealth-management services”

Yogesh Sapkale (MLD): Tell us about the wealth management services of BNP Paribas.Sharad Sharma (SS): Wealth management services in India started in 2001 and BNP Paribas was amongst the first to start. Since then we have been very consistently trying to emphasise more on the quality build-up rather than volumes. Our attrition rates for clients are very low. Acquiring client details is a long process and we would like our clients to stick to us for a much longer period. As of today, we have relations with around 1,000 family groups. Actual account numbers can be much more because one family can have 4 or 5 accounts. What is unique about our client relations is we give them a solution which is holistic rather than sticking to what the license permits.

MLD: What are your core target segments?
SS: Our target market comprises business families, entrepreneurs, professionals and senior management professionals. The segment of smaller entrepreneurs is where we see the maximum possibility for our value-added services. That's the most preferred client segment. And we know that tremendous growth is expected in the years to come. This also means more and more individuals are seeking specialised advice in managing their growing wealth.

MLD: In India, the number of wealthy fell by nearly a third to 84,000 in 2008, the fastest drop in the world after Hong Kong. During the recent turmoil, many of the players in the wealth management business have lost clients. What is the situation right now?
SS: Last year, a lot of clients were moving out from risk assets to risk-free kind of assets. There is certainly a marked change in the situation today than it was a year ago. The rise in the markets has been swift so far. The sentiment has changed and investment appetite is gradually reviving, driven by the performance of asset classes. We feel that there is never is a perfect time to enter the market.

Investment in equity has to be over a three-five year horizon. I must add, we were barely impacted by any loss in clients. There was a large segment among the wealthy which was not using wealth management services. They are using advisory services now rather than doing it on a standalone basis or picking and choosing each service provider for only the transactions they wanted to do.

MLD: How much current client assets under management BNP Paribas has at present and where you see BNP Paribas in the next 12 months?
SS:
Client assets in all organisations are a mix of things and so an apple to apple comparison is not possible. But I can say our growth has been fast. I see growth in terms of adding more and more families. On the asset side, the growth based on the acquisition will keep on increasing as well as on the wallet size of existing clients.

MLD: Many of the millionaires in India are first-generation, mostly created by the stock market boom between 2003 and 2007. How does BNP Paribas deal with their expectations?
SS:
In fact, the new generation of wealthy are the ones open to using professional services. The reason is they have grown using the most modern facilities and practices available in their own industry and the same attitude applies for handling their wealth. They are very receptive to new ideas.

MLD: Financial institutions have divided wealth management services market into four segments based on income levels. Is that logical?
SS:
The requirements, perceptions, risk appetite will be different for different segments. Segmentation helps in aligning the advice, products, services and delivery channels to their specific needs.

MLD: Do you have specific criteria for selecting new clients?
SS:
The starting point is $1 million plus investment. That is a good starting point and we build on that.

MLD: Most local wealth management service providers accuse global players with some concerns in the longevity and stability and their commitment to India. Your comments…
SS:
Well, all I can say is that BNP Paribas will shortly be completing 150 years in India, in some form or the other, so we have been around for a while now.

MLD: Going forward, the competition in the wealth management segment is bound to increase. How you plan to tackle it?
SS:
We welcome competition because as more and more organised players come, the market practices will improve and ultimately it will be the resident Indians, who will have better services. We were early entrants, so we already have gone through the learning curve much earlier. We also bring in the best practices and more experience.

MLD: If I have to differentiate between BNP Paribas Wealth Management and others, what would be your USP?
SS:
The biggest factor is we are not transaction oriented. We are more focussed on long term relationship oriented approach.

MLD: What about marketing practices?
SS:
Our marketing is based on a simple principle: understand the client's total requirement. We are not going to go with a single product but rather with a holistic approach. We find solutions for clients and not really sell products. That's how we probably build.

MLD: What about growth through consolidation, mergers and acquisitions?
SS:
I think it is too premature for consolidation in wealth management segment because as of now the penetration levels are quite low. I think consolidation is a few years away.
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‘We can provide as much opportunity as the entire world needs’

In an exclusive interview with Moneylife, Nilesh Shah, deputy managing director, ICICI Prudential AMC, gives his perspective on the current market rally and where the markets are headed. Moneylife presents the first in a three-part series of the interview.

ML: Are we witnessing the start of a new bull market?
Nilesh Shah:
I can't categorise this as a bull market but if you ask me if optimism returning to investors as well as companies and regulators and government or fund managers, the answer is yes. And to some extent it is reflected in the valuations. Unfortunately I don't follow price patterns as much, but we are today probably standing at a place where crossing the previous high can easily be achieved, provided certain actions are taken and some reactions are generated. The world has lots of money and less opportunities. We can provide as much opportunity as the entire world needs. Our savings and investments can generate 5%-6% growth. But that's not good enough for us or the market to sustain this momentum forever. But if we can augment our savings vis-a-vis the capital flows from foreigners and convert that into meaningful investments, then suddenly that 5-6% starts increasing to 8-9%. The moment you put this kind of growth in any equation, then everything turns bullish. It's akin to what Japan delivered between 1970s-1990s, when global capital flows along with Japan's absorption capacity turned it into a developed nation. A smaller pattern was witnessed in Southeast Asian nations when some countries moved further, some moved a little later but overall they moved further up. And the latest example is China. With capital absorption, they have just kept on growing and growing. We today have the same opportunity. The world has lots of money. Virtually the entire world banking system is a safe deposit locker. You put money and don't get anything back on the interest side. So if we can position ourselves and use this to enhance growth to 8-9%, clearly the market has much higher level to go.

ML: How different is the current rally from 2004-06 or 2006-08 periods?
NS:
In May, June 2006 when the markets corrected, the economy was not correcting. While inflation and interest rates were probably moving up, they were just brakes in an accelerating car. They were not speed breakers. We were trying to stabilise the speed of the car on a curve, which we did and eventually the market realised that this is not a speed breaker, it was just a brake in an accelerating car, the car is still moving and the markets recovered pretty well. Surprisingly, the speed of the recovery then was also quite nice. And most importantly the investor confidence, barring a few instances did not really shatter. At 11,000 or 12,000 when the correction occurred, by the time it started reaching 10,000 and 9,000 and eventually just a shade above 8,000, domestic money kept on flowing. So there was huge confidence that this is just a temporary phase and will recover. If we go back to 2003-04, it was an end of a prolonged bear phase. From 2000 to 2003, it was a horrible nightmare, people lost tons of money and lot of people made a lot of mistakes, at the issuer level, investor level, probably regulatory level. Somewhere in May2004 when the correction came after the recovery from 2003 lows, it was purely on the event of election results surprising the market. While May 2009 surprised positively, May 2004 was a negative surprise.

But a lot of weightage was being given to the announcements which were being made in the media and there was a fear about how the economy would shape up. But the reality was that the economy didn't lose its momentum with change in government; in fact, growth picked up. The foreign capital flows continued, so did the momentum and growth of economy. In fact we sustained it all the way up to 2008. So May 2004 as well as May 2006 were, in hindsight, an opportunity to invest. It provided an overextended market a temporary break, but it was a break on a curve and the overall momentum continued. I think what we witnessed in 2008 was substantially different. It was driven by the exodus of capital from foreigners who were withdrawing not because we were doing badly but because they had certain other considerations.

The collapse of global financial giants pushed us into an unknown territory. We hadn't experienced this earlier and the economy did suffer. We were always highlighting that India is a different country, not depending on exports and the reality was that in the whole of 2008 we were falling more than the other counterparts and the decoupling story was flying in our face. We couldn't understand why that was happening. But courtesy the efforts taken by the RBI and govt, slowly and steadily we recovered. Today when we see our markets trading at the second-half level of 2007, we are just one year behind. Most of the developed markets are 10 years behind. The decoupling theory which didn't work in 2008 has actually worked in 2009. We are late by a few months but we are not wrong completely.

ML: Is the current market overvalued or fairly valued given that the market may be discounting the growth of 2010 and beyond?
NS:
The market has probably run up too fast, because a lot of investors wanted to participate and couldn’t do so. Has it run fast vis-a-vis the valuations and fundamentals? The answer is no. We were trading at a cheap and attractive zone at just 10 times one year forward earnings in March. Even though interest rates were coming down it didn’t really benefit the stock market in terms of change in valuation. But once the confidence started returning from March, April, May onwards, the markets have come back to fair value levels. Probably it is a little bit at the higher end of the fair value, but again that’s a reflection of optimism. People are bit more bullish about the future and it is reflected in the markets. {break}

‘We can support our growth from our own capital’
In an exclusive interview with Moneylife, Nilesh Shah, deputy managing director, ICICI Prudential AMC, gives his perspective on the current market rally and where the markets are headed. Moneylife presents the second in a three-part series of the interview.


ML: What are the key factors you would watch out for signs of significant reversal?
NS:
At the end of the day if 8% growth happens, notwithstanding small corrections, we can be reasonably sure that markets will continue to move up. At 8% growth rate even interest rates need not move up. We can have a virtuous cycle which can support us or we could have a vicious cycle which could derail us. The optimism is basically driven from the fact that we are generating about 25% savings and putting similar amount in investments. With that savings and investments we are able to generate just around 5%-6% kind of growth. If we can increase our productivity, it could easily become 8%-9% growth. The productivity is not going to increase overnight. For that infrastructure needs to be developed, deficit needs to be cured. For that certain real reforms have to happen in the real economy. I think all of that will follow, but at a slow and steady pace. The second shortcut is that we get money from overseas investors and convert that into capital. My feeling is that the world can give us that capital. People are talking about China and India virtually in the same breath, but the allocation is far more tilted towards China. We can bridge that gap. With that capital coming in, we can accelerate growth, which will accelerate government revenue, narrow down deficit problem, reduce interest rate pressure and reasonable liquidity becomes available.
With that jobs and employment will be created, more consumption will happen, optimism will prevail, corporate earnings will go up. The entire virtuous cycle will prevail for us, in which scenario equity markets will continue to move up. The vicious cycle could come is essentially because of two things. One, the real reforms don’t happen in the economy and hence the absorption capacity does not increase. Capital flows go towards asset price inflation, building up of bubbles, rather then building up of real assets. If that happens then we are back to the old story where eventually the bubble burst. So there have to be some real reforms in terms of improving the absorption capacity. We are seeing some improvements happening but it is not sufficient. We can do better. Like the ultra mega power projects announced some time back. None of these are moving at the speed they should. Same is the case with coal allocations. Bank credit growth has definitely slowed down in response to falling raw material prices, oil companies are not borrowing as much as before. But this slack of bank credit should have been absorbed either by the planned capex or infrastructure development. The slowdown in bank credit probably signifies that the real economy’s absorption capacity is not as high, so that we can be sure of that 8% growth on a sustained basis.

ML: Is there too much of complacency not only about global growth but also about the domestic growth situation?
NS:
I think what we are seeing is the difference in the return expectation of investors. The Japanese investors investing in India will probably be happy with 5%-10% return because he is comparing with a 0.1% return on his deposits. An Indian investor on the other hand is looking for 30-40% return because he is comparing with previous experience. So we are seeing participation from different sets of investors with different return expectations, time horizons and hence the shrugging off of certain short term economic issues.

ML: Domestic investors have poured more funds into the markets. Have we finally shrugged off our huge dependence on FIIs? If so, what are the long-term implications?
NS:
I think while we suffer from the limitation of long term investment on the equity side by pension funds and retirement funds, we are seeing the emergence of insurance companies and mutual funds as a major force. They are acting as a stabilising factor for the Indian equity market. Very recently Goldman Sachs came up with a research report that said that India can actually fund the entire $7 trillion worth of infrastructure investment from its own savings. We don’t need foreign capital. This is based on certain assumptions and projections, but it shows the enormous power of Indian savings. For us savings comes naturally. We still don’t have the American lifestyle of living on credit cards. We live within our means. So we have this ability to support our own growth from our own capital.

ML: At what stage would inflation and higher interest rates be worrying factors given the higher high liquidity in the system, rising prices and huge government borrowing?
NS:
Somewhere between 1997-2003, our fiscal deficit remained at an elevated level, which is why stock markets fluctuated. It went up because of certain reasons other than fundamentals. Overall it didn’t go anywhere. From 2002, fiscal deficit started contracting. Fiscal responsibility and budget management reduced the deficit from around 7% levels to 3%. This created the brand value of India. Our equity markets expanded almost 7 times in those four-five years. Then in 2008-09 again we saw an exceptional response from the government. It resulted in higher deficit and the market valuation corrected. Now there is hope, that though deficits are high, they are cyclical in nature, they will come down.{break}

‘Infrastructure remains a bottleneck for growth’
In an exclusive interview with Moneylife, Nilesh Shah, deputy managing director, ICICI Prudential AMC, gives his perspective on the current market rally and where the markets are headed. Moneylife presents the final part in a three-part series of the interview.

ML: What are your expectations regarding corporate performance and which sectors do you see outperforming?
NS:
I think the sectors which could create outperformance for Indian equity markets are the sectors related to infrastructure. We are lacking in infrastructure and it is acting as a bottleneck for growth. Infrastructure sectors will have to receive priority if growth is to sustain. During the Green Revolution certain areas were given priority such as hybrid seeds, irrigation and fertilisers. Suddenly the farm productivity went up. The same kind of approach would be required towards infrastructure sector. So, probably roads, towers, power transmission and such kind of things which actually create the building blocks for connectivity for sustaining growth, will receive special treatment. They will probably outperform. The second growth sector is consumption. At the end of the day we are a domestic consumption story also and while savings and investments will continue to give a fillip to the infrastructure side, the rest of the amount is going to be spent and hence the consumption sector will do well. The problem is there will sometimes be down trading. So company X which is at the higher end may not benefit but company Y which is at the mid-end could do very well.

On the other hand you could have newer trends emerging on the consumption side as people move up on the income curve. So per se, in consumption sector, you will have to identify the trend and identify the companies. Consumption as a sector will do well but you really have to focus on the companies also. The other sectors are difficult to evaluate. Earlier, life was very easy when you invested in a steel company; all you wanted to know was selling price. You could then have actually create an Excel sheet showing 10% or 20% growth rate for a steel or aluminium company without any worry and genuinely believe in it. Now, a mine getting closed in Zambia or an earthquake occurring in Sumatra has an impact on all these things. So, with so many variables, it is difficult to remain bullish on the commodities sector. Technology as a sector has run up significantly well and they are witnessing two contrasting trends. One, in their top-line they are seeing some revival, global growth is happening, financial institutions have started placing the orders and they are seeing some large orders. On the other hand, the cost cutting measures, which they had adopted are almost coming to an end. They have to actually increase salaries. I think their employee turnover will also increase as more and more people start chasing the talent. Third, the rental cost and lease costs will also start increasing. So we will see a good differentiator where top-line is improving but at the same time the margins are getting impacted because of the domestic factors. Since valuation appears rich and the currency has appreciated a little bit, probably in the short term there could be some impact on the technology sector. But overall one can remain bullish. However, a lot of technology companies are fairly large in size and hence the growth will not be as good as it was in the past. So we will have to price the growth correctly.

ML: With the markets back in full swing, IPOs are back in vogue. A big burst of IPOs is usually is a contrarian indicator. What is your sense?
NS:
Definitely, the supply of paper is necessary to balance the appetite of investors and ensuring that the liquidity does not end up creating a bubble. As long as markets are functioning efficiently, I think investors are smart enough to price the issues properly. There will be one or two issues which will fail because of over-pricing. The promoter’s need and investor’s greed will be balanced out. We haven’t yet seen a mad rush of IPOs. We could argue with the valuations for some of these companies but the fundamentals are beyond doubt. We have seen how some IPOs had to be extended even though they were reasonably priced. It just didn’t generate investor interest. So I think that IPOs should come in good quantum, of good companies and let the pricing be market determined. One or two issues may be priced aggressively. Somewhere Maruti’s IPO generated the trigger for the bull market to hit India. My feeling is that if we can see similar type of IPOs from PSUs or the private sector, it will enhance this rally, rather than curtail it.

ML: What is the direction of the market over the short-term, medium-term and
long-term?
NS:
Long-term, I am extremely bullish. I think the virtuous cycle will prevail. We will probably move in true Indian style of two steps forward and one step backward. Over the medium-term also we are reasonably bullish. We have political stability, desire for growth, entrepreneurs, resources, consumers and now capital is available. We need catalysts in the form of reforms so that this entire process can be speeded up. The short-term is difficult to predict. The markets are no longer cheap or attractive; they are fairly priced. A small correction here or there is always possible. We will have to keep one eye on the liquidity factor as it can change colour very fast, but I would advise investors not to get deterred by the short-term volatility and keep an eye on the medium-long term. 


 


 

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‘Industrial recovery was stronger than expected’

Moneylife presents the second part in a three-part series of the interview with Vetri Subramaniam, Equity Head, Religare AMC.

ML: Why has the market so quickly discounted the impact of the monsoon?
Vetri Subramaniam:
I think the monsoon is not a significant factor. When you look at data like monsoon is 20% less, how much does it affect the GDP growth? I am not an expert in this issue but it suggests to me that there is some kind of downside pressure on the economy coming through from agriculture. But I think the reason why the market has looked beyond is actually something else and that is essentially the fact that the industrial recovery has been far stronger then what we had anticipated. I mean six months ago our baseline view was that we would grow at a 6%-6.5% and while my baseline view has still not changed, that number frankly should be revised upwards given the strength in the industrial production. The only reason that it has not been revised upwards is only because of the weakness that we can eventually see from a poor monsoon.

ML: Domestic investors have poured more funds into the markets. Have we finally shrugged off our huge dependence on FIIs? If so, what are the long-term implications?
VS
: Well, the rally was started more by foreign money. You can argue that the paper that was floating around was actually sucked out in the first place by domestic investors during late 2008 and early 2009. I think the bigger issue is that pretty much since 2007, the total domestic institutional buying-whether it is insurance, banks, mutual funds put together-has actually been more than what the foreigners have done. I think this is an important trend and it's a trend that will at some level eventually sustain because at the end of the day the economy is growing in nominal terms at 10%-12% and incomes are growing and when incomes are growing investible surpluses are growing. They have to go somewhere. Obviously the asset class of choice much to our chagrin has been ULIPs over the last three-four years. Maybe it will be the New Pension Scheme in the next three-four years. Eventually this money has to find a home somewhere. If you say this money won't go into the equities because the Indian investors are very risk-averse, I would argue it would equally end up creating an asset bubble, because the money would then flow into bank fixed deposits. Then we should not be discussing rate tightness; we should be discussing 5% rate for FDs. Eventually something has to balance out the equation and I think the pure fact that you are continuing to grow at nominal terms 12-14% GDP means that incomes are growing and disposable savings are growing and equities are bound to benefit.

ML: What are your expectations regarding corporate performance and which sectors do you see outperforming?
VS:
I think the resilience has been more on the economic numbers rather than necessarily in earnings and particularly balance sheets. A lot of the pain which was not felt in the economy was recorded in the earnings and lot of the pain that was not recorded on the earnings was recorded in the balance sheet. Companies have done all sorts of accounting jugglery; they used the rules to their advantage to not take into account what they should have had on their P&L and all of that. Maybe the true extent of non-performing loans has also not been recorded in the system because the RBI gave a time-window to the banks. I don't think the true extent of earnings damage has been captured fully in all the reported numbers. Having said that, in terms of a trend, the June quarter numbers were clearly a little bit of a surprise, but more because of cost-related issue rather than top-line. My sense is that the second quarter will be more of the same. Maybe the top-line is still going to look uneven but the bottom line will look much better, but by the time you get to the end of the year, the cost pressures are going to start catching up again. We already started having pressure on most cost items whether raw materials, salaries, fixed overheads all of them have started to inch back up again. It's interesting that you actually saw some of the best operating margins that companies have ever recorded in the last eight years being reported in the June quarter, when we were just coming out of a recovery. I think at some level they will have to give out some of their margins back either because of the pressure of raw materials or because of competitive pressures. Margins cannot stay at these elevated levels for so long. But hopefully it may get replaced by some element of top-line growth by the time you get into the fourth quarter and that should be possible because on a year-on-year basis obviously your volume numbers should grow as per your expectations. Our key preference remains for domestic consumption themes like consumer staples and consumer discretionary items. Not that they are absent of valuation issues but the valuation issues are across the market. Banking and finance companies too feel that credit growth is starting to recover.
 
We are far more cautious about sectors that are more globally interconnected like the commodity space. We have been positive about IT but now valuations have gone up. But on a two-three year perspective, the IT business model will weather this downturn because the downturn in the western economy in this time is more consumer led rather than business led. The health of corporate balance sheets in the developed world is reasonably good. The financial system had a problem but that also has been largely put behind so I don't think spending trends will really get badly affected.

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