India: Structured Products 'Pick Up' In Tough Market (Economic Times)

Interview with Pradeep Dokania, MD & Head, Global Private Client, Merrill Lynch

With the stock markets showing heightened volatility, high net worth investors are looking at ways of fortifying their portfolio. Pradeep Dokania, managing director and head of Global Private Client at DSP Merrill Lynch.

How has the volatility in the stock markets impacted the investment decisions of the wealthy? Is there a loss of confidence in equities as an asset class?

Well, it would be unfair to say that equities are losing their sheen because of the market correction. In some ways this correction was very much due.

If you look at the case of the Chinese stock markets, it went up to an all time high in January this year, but has corrected about 50% already. The Indian stock market has corrected about 40% in the same time. This just goes to show that globalisation has linked all of us together; no one is insulated. Typically, our clients would have a balanced portfolio, with about 55% of their money in equity and the remainder in debt. With the correction in the markets, we would have seen a 5-10% change in the portfolio.

What are the new products that high net worth investors are looking at to invest in?

Structured products have picked up quite significantly with more investors gaining comfort with them. Structured products allow clients to take a view on an underlying (indices, stocks, interest rates, etc.,) asset class depending on their risk appetite. So if a client has a positive view of a particular asset class from a 1-2 year horizon but doesn’t want to directly take exposure, he can do so via a structured product. These are mostly capital guaranteed and fortify an investor’s portfolio to a large extent.

Other products like gold funds and gold exchange traded funds are also becoming popular. Offshore investments are a huge area where we see growth and Merrill Lynch has the most comprehensive global platform to offer these to our clients. In markets like the United States leverage products are a huge business, but they are high-risk products and are not very popular here.

What are the offshore investments options available to investors today?

Global products available to Indian investors include hedge funds, global mutual funds, private equity, commodities and real estate. The option to invest directly in equities in different markets is also available. For instance, two years ago a lot of investors put their money in eastern Europe. Products like alternative energy funds, mineral funds, water funds, gold funds and BRIC funds were pretty popular. More recently, markets like Brazil have done well and it makes sense to invest there.

Even in the US, certain stocks have done pretty well. Prime examples include stocks like Apple Computer and Nintendo.

In ideal circumstances, how much of an investor’s portfolio should be diversified into offshore investments? What are the tax implications?

In ideal circumstances, 15% of an investor’s portfolio should be diversified into offshore products and the rest in domestic investments. At the moment, maybe only 1% of an investor’s portfolio would be exposed to overseas investments. It is also important to remember that people are just beginning to experiment with global products because they have very little exposure or experience of investing abroad. There is no additional tax burden of investing overseas. A high net worth individual would pay at his marginal tax rate, 33% in most cases.

What is the impact of exchange rate fluctuations for an investor looking at putting his money overseas?

Well it’s not that big a deal really. I mean for someone who is wary of putting his money in the dollar, we can give them the option of investing in the euro. Private bankers overseas say that India doesn’t have the product suite to offer to clients. Is that true? Well there is no doubt that in certain developed markets the product basket is quite wide. For instance, structured products are huge business offshore but they are built on over the counter derivatives (OTC), which are not allowed here. Similarly, hedge funds and theme-based funds give investors a lot of options. However, every market evolves over a period of time and our wealth management industry is still at a nascent stage of growth. In the next five years our product basket will match the best in the world.

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China: Overseas Banks Grab Bigger Share (ShanghaiDaily.com)

By Zhang Fengming

OVERSEAS banks grabbed a bigger slice of the yuan wealth management products market in Shanghai in the first half of the year, the local regulator said yesterday.

Nine overseas banks, including HSBC, Citi, Standard Chartered and Bank of East Asia, had launched yuan-backed wealth management products by the end of June with an outstanding products value of 7.3 billion yuan (US$1.06 billion), up 65.82 percent from the beginning of the year, said the Shanghai Bureau of the China Banking Regulatory Commission.

The outstanding products value grew 3.76 times the level of a year ago. Overseas banks took in 5.14 billion yuan in the first half, already more than last year's total, the local banking watchdog said.

"Domestic banks still lead the yuan wealth management products market," said the regulator. "However, the rapid expansion recorded by overseas players is worth more attention."

Yuan-backed products contributed 78.06 percent of the total wealth management products in the city in terms of outstanding value. Yuan products accounted for 84.91 percent of products launched in the first six months.

Overseas currency-denominated products grew sluggishly in the city.

Overseas banks dominate in the structure products and qualified domestic institutional investors, while domestic banks have a bigger say in the trust-investment and currency products.

With more overseas banks offering yuan-backed trust products and more lining up to do so, this may change. Overseas players accounted for 49.53 percent of the city's total structured products, such as those linked to stock or commodities, with an outstanding products value of 13.2 billion yuan.

New products launched in the first half of this year have already surpassed last year's total in value.