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US crisis: HNIs turn their back on equities

By Vandana
September 23, 2008 11:27 IST
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The turbulence in global markets, which saw some large investment banks capsize in the subprime storm, has made retail investors as well as high networth individuals renunciate equity as an asset class. Lots of HNIs are now preferring to be in cash unlike past occasions, when they used to invest in equities, debt, commodities and real estate.

Investors are avoiding mostly equities as they do not see any major change in the market sentiment in the next few months. "Although people are not entering stocks, they are not even exiting it as they do not want to cash out in loss. However, some selling could be happening on highs," said a wealth manager.

The benchmark Sensex has fallen more than 40 per cent from its January peak and experts do not see any respite from the falling spree anytime soon. However, experts say that retail investors, though in a small number, are coming to equity mutual funds though systematic investment plans and HNIs are bottom-fishing in the market. They are now looking for value picks as the steep correction has brought a lot of large-cap stocks down to attractive levels.

Says Leslie Menkes, managing director, Onshore Private Wealth Management Asia at Morgan Stanley, "HNIs have become very conservative. They are de-emphasising equity and over-emphasising cash. Lots of them are waiting in the wings for the market to stabilise."

As a result, fixed income has turned out to be a risk-free investment option, say private banking executives. A majority of the allocation of HNIs nowadays is going towards fixed maturity plans, fixed deposits and short-term (30-90 days) papers.

According to Reserve Bank of India figures, fixed deposits witnessed a sharp growth of Rs 35,403 crore (Rs 354.03 billion) in 30 days ending August 29. FMPs, too, have been attracting a lot of interest as liquid and money market schemes saw inflows of Rs 285,267 crore (Rs 2852.67 billion) in August, according to Association for Mutual Funds in India data.

Investors, who were investing in unrated papers with high coupon rates in search of better returns some months ago, are now taking no risks. They have become more conscious about the quality of credit as the whole subprime issue centred around credit quality.

HNIs had been excessively parking their money in structured products, but with the credit issue once again in the limelight, they are now assessing the payback ability of institutions before investing.

Capital-guaranteed structured products, which have a part of the investment in debt while other is invested in an underlying such as equity, are quite popular in India.

Head of Wealth Management at Centrum, Sriram Venkatasubramanian says, "People have started questioning structured products underwritten by Lehman Brothers. Investors used to allocate at least 10-15 per cent in these products."

A correction in real estate prices coupled with high interest rates has deterred investors from parking their money in flats and plots of land, which earlier used to be a prime destination for HNIs. Commodities are still not a very popular asset class in India. However, say wealth managers, of late investors have started investing in gold with global inflation at a high.

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