Edelweiss has grown to become one of India’s leading financial services firms. The firm services hedge funds and other buy-side clients globally, with a specific focus on helping them with the Indian market. Last month, Edelweiss was one of the sponsors of the Hedge Funds Club’s year-end event in Tokyo and HFC’s Stefan Nilsson took the opportunity to have a chat with Shiv Sehgal, President and Co-Head, Institutional Clients Group at Edelweiss.
How is India shaping up in the overall emerging market pack after all the structural reforms are underway?
Well, 2019 has been one of the worst years for the Indian economy from a growth perspective. Whatever could potentially go wrong went wrong – all-time low credit growth, electricity generation contracting, double-digit contraction in autos, etc. However, I think things are finally looking better. First, with the Fed resuming balance sheet expansion, global financial conditions are easing – this should put a floor under the falling global activity. Second, India’s rural economy has been in deep distress in the last three-to-five years. With food prices normalising, farm sector cash flows should improve. This will aid, rural consumption. Third, RBI has been very pro-active on the liquidity front. This will reduce risk aversion and improve transmission. Hence, to that extent, we think that 2020 could therefore very well be the year of a cyclical recovery for the economy. A cyclical recovery will help reversion in profitability metrics such as corporate profits to GDP ratio, return on equity, profit to sales etc, all of which have been declining for over a decade and are at multi-year lows currently. Also, from a micro outlook perspective, the tight liquidity and growth slowdown of the last two years led to sharp risk aversion and balance sheet was the most important criteria for investing. However, with liquidity now easing and markets being extremely polarised, it is important that investors shift focus from balance sheet to P&L and more importantly valuations. Hence, we would hunt for stocks with cheap valuations and depressed earnings in sectors which are exposed to global economy (metals, export auto), rural economy (tractor companies, agrochemicals), rate sensitives (industrials, auto ancillary) and select NBFCs. I would like to add that Indians comprise roughly one-sixth of the world, one-fifth of internet users and one-fourth of digital consumers – what many consider to be the world’s biggest and mostly untapped digital market. Yet, internet penetration in rural India is still only 18%, compared to 59% in its cities. This has huge investment implications for this new decade.
How is Edelweiss placed in this space?
Over the last two-and-a-half decades, we have evolved our product suite, our orientation, people skills, systems, risk and governance structures to service clients both domestic and global who believe in the India growth story. This single-minded focused, dedicated mindset has made Edelweiss successful in putting India on the map of global investments, be it alternatives, distress debt, capital markets, fixed income or ESG. What started in 1996 with $30,000 in revenue is today in its 25th year, one of India’s largest diversified financial players with close to a billion dollars in revenue. We believe 2020 is a year of normalisation – normalisation of liquidity, exports and food prices. This should drive a normalisation in markets as well, as mid-sized firms, intermediaries, ancillary, etc. that have been hit over the past 18 months, catch-up with their larger peers and start delivering numbers. That segment of the market has traditionally been our sweet spot, whether it’s bringing these firms to market or just the existing listed space where we have one of the widest coverage amongst the major brokerages.
How does 2020 look like from a hedge fund perspective?
While the frontline indices have returned around 11% in the calendar year – returns have been highly concentrated in the top 10-15 names only. Also, 2019 has come on the back of years disrupted by demonetisation and GST implementation which has had its share in slowing the economy further. We believe, for hedge funds to make a comeback in 2020, what’s needed is broad basing of returns beyond the top 10-15 names, less disruptive policies and hopefully less domestic disruptions. India has been a challenging market for the classic long-short funds as liquidity beyond the index names tends to be a challenge. Given that structure, BFSI and consumer tend to be sectors that are most popular with hedge funds. Last year, post the ILFS issue, the broader BFSI space saw a massive disruption and the consumer space too has had its share of growth pangs given the broad-based slowdown. Drawing from the earlier point on normalisation, both liquidity and farm price normalisation should bring hedge fund interest back in these sectors and thus revive a broader interest in India. For financials, the additional kicker is the progress we’ve made on bad debt resolution. Having seen some success last year, there is greater confidence in resolutions and these playing out this year. Investors will watch the space closely.
What triggered your move from a Wall Street firm to a home-grown Indian conglomerate like Edelweiss?
My own journey has been an unconventional one – after working on the buy-side for well over a decade in Sydney and Singapore, mainly for emerging market hedge funds, I made the career-switch to a global sell-side firm to look after their India institutional trading franchise. This decision was also led at the time by PM Modi’s landslide victory which further bolstered my view that it would create an opportunity and result in a paradigm shift in the country’s economic outlook for years to come. After being in India for a few years now, it is clear to me that a young fast-growing, fiercely competitive and well-regarded platform like Edelweiss was the right fit for me. My new endeavour aims to leverage and build upon my expertise creating a top-class leading Indian equity franchise.
How do you see the Edelweiss story unfolding?
Edelweiss is today one of India’s leading financial services conglomerates, offering a robust platform, to a diversified client base across domestic and global geographies. Our continuous and single-minded focus is on understanding customers’ needs and offering the right financial solutions. Being present in every financial life stage of a customer, helping them create, grow and protect their wealth, are our key lines of business. This diversified business model reflects our experience across India’s multiple consuming facets, from industrial behemoths and large companies to small businesses as well as the average Indian urban and rural household. I truly believe that India represents possibly among the best long-term prospects in terms of stability and sustainability and Edelweiss would like to be at the forefront of this wealth creation opportunity for its clients as India embarks on its true potential in the coming decade.