The world is in an interesting space. Strong leaders across the world have made economic revival on a fast track basis difficult. The result of this is market volatility and in some situations can cause investors to lose the shirt. The question for many investors within India and overseas is
“How do I stay a millionaire? How do I protect capital and yet generate returns in excess of inflation?
How do we position our portfolios over the current economic environment woes globally if not locally?
Let’s explore the relevant pieces of opportunity and clear the puzzle in our minds
Many secured debentures which are rated AA & above deliver returns in the region of 8-10 percent. This is a good yield considering bank fds at around 6.5% for one year. On a post tax basis if you are in the superrich bracket of 2-5 crores the returns are still around 6% post tax. This is an interesting option.
What are the risks involved?
Potential default of the paper is a possibility. However with the lending environment improving for NBFC’s, this is unlikely as those that have survived the storm so far are likely to maintain a similar rating going forward.
The debt market is good for medium-long term as capital appreciation is likely on account of rate cuts. Given the global situation in terms of interest rates coming closer to zero, possibility of RBI reducing rates beyond 5% repo rate from the current 5.4% seems unlikely as per most economists.
Annuities –some of them deliver returns in the region of 5-6% on a post tax basis. This for a person in the super rich slab is still attractive given other limited options.
What can go wrong?
If the investor has low levels of liquidity at a portfolio level this may not be a relevant strategy. If liquidity is available this can be considered.
Short term paper with duration of upto 3 years is good from a solvency forecast point of view. Even in the earlier cycle leveraged entities like il&fs subsidiaries like itnl have been able to clear their dues till a 3 year period. It is the longer term paper beyond 3 years which has caused panic in the financial institutions space and the liquidity crisis since September last year.
Indexation benefits have helped investors earn a return of 7% plus post tax despite commercial paper issues default like dhfl.
Arbritrage is a tested strategy especially in volatile markets. If volatility goes up then the returns increase.I personally recollect reviewing a clients portfolio in which arbitrage was an outperformer at around 11% around 2008-9.
The only minus point with arbitrage is that returns are not guaranteed. If volatility reduces so do the returns.
The world is going through a disruption, or a series of potent game changing events both within India and outside. Most investors even if they have a negative view on the markets do not benefit from it meaningfully as they do not park their hard earned money in shorting the markets.
In these situations hedge funds act as specialists which deliver. Given the current tax structure they are more likely to deliver a return of 11-13% on a post tax basis.
Private equity on affordable housing is a recommended theme at our end as the government support for housing for all is there at the government level.
At a company level or pre-ipo transactions, lot of investors have been stuck with bad choices as currently equity markets are not performing well.
What is to be avoided?
A lot of options are to be considered for avoiding actively and the list only increases every quarter
Company fixed deposits being unsecured
Preference shares of leveraged companies/nbfcs
Any secured debenture below A grade of paper
Any leveraged position on an international/cross currency basis as risk reward is not favorable on account of trade war dynamics.
Private equity on mainstream real estate/ structured debt on asset light companies-as liquidation value are limited in case of an extreme event like default
Any controversial nbfc paper despite being adequately rated
Structured products issued by nbfcs-Return of capital are likely to be an issue if overleveraged.
Generally if they are raising capital through debentures like structures it is more of a rob peter to pay Paul kind of a situation.
Anything which seems too good to be true.
Happy Investing! May you choose wisely.