3Q Private Wealth

President Donald Trump is back. Something that majority of the global investor community wanted. Markets moved up, Dollar strengthened, Treasury yields went up (fear of probable rising inflation on the back of expansionary fiscal policies- "Trump Trade"). So, bond investors are a bit jittery. However, it is pertinent to note that we continue to witness strong buying interest in the Treasury auctions. The FOMC meet scheduled in the next 1 day could be very interesting. After the rising yields despite a 50 bps rate cut on the last instance, will FED show the gumption to cut further, or hold the rates? We shall know soon, but can't be surprised with a pause now. Imperative to note is that FED isn't really in "true control" of the longer end of the yield curve, and sentiments play a major role. However, investors do believe that measures like "Operation Twist", "Bonds Repurchase" do give FED that power to indirectly control that end. The 10 year yield is around 4.30%, and the 30 year around 4.5%. While pundits are today arguing that FED jumped early in the rate cut initiative, articles around July of this year questioned if FED has waited too long to cut rates. The next question in everyone's mind would be about India. Will RBI cut rates soon, or take a cue from the yield rise post FED rate cut, and delay that decision? What could be the likely impact of a status quo on the Indian markets? Suddenly the central bank doesn't look to be in sync with its US counterpart anymore. RBI governor Mr. Das said Oct inflation numbers could be worse than 5.49%, and that he isn't in a hurry to cut rates. He also chose to reserve his opinion about any slowdown in the economy. This means that the earlier opinions of the market about easing rates this year would need to be reviewed as the rate cuts could be delayed. Simply put, the returns from the long duration bond exposures would probably not reward the investors in the short term, and they would need to increase their time horizon to realise their desired yields.

The key to unhappiness in any relationship is mismatch of expectations. Whether it's a personal relationship, or professional, dissatisfaction creeps in when the divergence of expectations increase without any catalyst to bridge it. While personally one can't overthink while building relationships, professionally however, one has a little more breadth (read: choice) while initiating a partnership. In the financial markets, if I speak from a client - advisor perspective, both should have a scope of mutual value addition without compromising on their ethos. In my experience, large, informed, multi generational wealthy clients are crystal clear about what they need. To give an example, there is a fairly large universe of investors who understand how difficult it is to generate long term returns of 12% to 15% by taking "manageable" risks, and they thoroughly appreciate if that goal is reached without breaching the risk parameters. Similarly, there is also a large set of new wealthy investors who much prefer taking higher risks to generate a much higher return. To the former set of investors, concepts like value at risk (downside estimates) are an important tool, while for the latter, shortfall risk (risk of not being able to reach a particular wealth goal due to conservative allocations/ products). Obviously that means that the second set of investors would not only prefer an aggressive asset allocation, but also find greater merit in Alternate Asset classes and hedge funds (more focus at product level). While there is no right or wrong way to go about it, but generally it has been found that valuations based macro asset allocation calls have more often than not provided superior risk adjusted returns over the longer run, while products (especially momentum focused) have worked well in cycles. Going back to my initial line of discussions- the relationships- it is most important for an advisor to think if he can add value to the client, and not just present product ideas (which can never be a sustainable USP) while initiating a new relationship. Similarly, a client must evaluate if he is actually in need of an advisor for a suitable process oriented wealth management, or does he want to restrict the advisor's role to only product recommendation (Need an "advisor" at the first place?). Either way, there should be scope of value addition on the back of thorough sustainable processes involving understanding of each other's working methods and preferences, creating an IPS, creating asset allocation strategies, formulating do's and don'ts, and consistent feedback process. Irrespective of the business pressure (or pressure from the client), one must ensure adherence to the principles right at the initiation of the relationship, with clear communication of prerequisites and deliverables. Similarly a client must be forthcoming about his expectations and evaluate if they can be realistically met by the advisor. Key to long lasting and happy relationships.