India’s wealthy beware: the country’s booming stock market could be nearing a peak. So runs the advice from Jaideep Hansraj, chief executive officer of the wealth management unit of Kotak Mahindra Bank Ltd., one of the largest advisers to the country’s rich. The 22 percent rally in India’s S&P BSE Sensex index so far this year has been propelled in part by a shift out of cash and real estate following Prime Minister Narendra Modi’s decision to cancel old banknotes in November in an effort to clamp down on corruption and tax evasion. That has discouraged cash investments in property, a traditional route for avoiding taxes.
But Hansraj doesn’t recommend selling out of the Indian stock market just yet, rather that his wealthy clients hedge some of their positions against any sudden reversal. “There is no question about the fact that valuations are stretched right now,” Hansraj said in an interview earlier this month. “But no one knows how long this liquidity-driven party is going to continue and a re-entry may be tough. So we are advising clients not to sell, but to hedge investments in stocks,” he added.
The shift out of cash and real estate into the stock market triggered the highest-ever monthly inflows into Indian mutual funds in August, a total of $4.1 billion, helping make the Indian benchmark index one of the best performers for the year among major economies. The gains “could stretch market valuations despite anemic earnings growth and offset selling by foreign institutional investors,” analysts at Deutsche Bank AG warned in a Sept. 12 note. And central bankers have expressed concerns as well. Michael Patra, a member of the Reserve Bank of India’s rate-setting panel, described stock market conditions as “frothy and bubbly” in the minutes of last month’s meeting.
Despite those fears, Hansraj sees the shift out of real estate continuing, with demonetization forcing more Indians to come clean on their wealth.“At one point of time there was a lot of unaccounted money that could go into real estate as an asset class,” he said. “Today with most of the money accounted for people are realizing that financial assets are a way better bet than real estate or gold.”
Apartment sales in India’s top seven cities have slowed to the lowest level in at least three years, data compiled by Anarock Property Consultants show. India’s domestic wealth managers are reaping most of the benefits of the shift into equities and out of real estate. UBS Group AG, Morgan Stanley and Macquarie Group Ltd. are among the firms that have opted to exit India’s private-wealth market in recent years to focus on other markets, amid a reluctance among many Indians to pay advisory fees.
Kotak, IIFL Wealth & Asset Management and ICICI Private Bank, three local firms, are the largest domestic wealth managers, according to Asian Private Banker. Kotak says it advises 44 of India’s 100 richest families. “You need to be Indian and also a bank to thrive in the private banking business here,” said Hansraj. “The strategy and mentality should be driven through an India lens, while being a bank will help in building the trust factor and provide convenience by catering to all financial services needs under one roof,” he added. Kotak is seeking to grow wealth assets by about 30 percent every year and had about 1.1 trillion rupees ($17 billion) under management as of June 30, Hansraj said.