How volatility in global markets changed investment choices of UHNIs

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2020 was a year that the world wanted to forget. From the coronavirus raging across geographies to political fiascos surrounding the US’ strained relations with countries such as China and Iran. People from all walks of life had to make life-changing decisions.

The virus caused a ripple effect in day-to-day life resulting in job layoffs and resource shortages. Therefore, great importance was given to creating a sense of security in terms of the availability of money in an uncertain economy.

The substantial volatility in global markets created a paradigm shift of investment choices in the eyes of individuals and institutions who once believed that they were prepared for the worst.

The consensus with the public in times of distress inclined towards safe investments like gold and cash in hand, and the equity market started seeing a great shift in terms of sectors that were once proven to be more secure and have been known to weather the storm of an economic crisis.

• The pharmaceutical sector quite obviously seemed to be the most reliable option available amid a pandemic in terms of the solutions it offered to the inherent health-related issues in the market and the growth in the sector
• Environmental, social, and governance (ESG) values and global sentiment surrounding ethical and responsible investments in times of global uncertainty led to investors flocking towards companies that had proven to be engulfed in this sector, and was inherently shown to be one of the best overall performing stock sectors of 2020
• Lastly, the technology transformation that followed in 2020 led to high amounts of investments coming into tech companies, especially those inclined towards consumer-related services, AI, and cloud communication

The road for institutions and high net worth individuals
While the losses in the financial market compounded at the beginning of the year and investment patterns of the world changed, we saw the trend for these ultra-high net worth individuals (UHNI) to capitalise on the situation.

Institutions and UHNIs started looking at avenues that wouldn’t be readily available to the regular retail investor but offered an opportunity to gain a significant amount. So, what really clicked with them?

The equity market is by far considered the most historically safe place to park funds due to the usual V-shaped recoveries that follow a crisis, but there was a need for a creative angle:

• Commodities such as gold, silver, and even agricultural products like cotton started to look like lucrative options that have traditionally shown a higher growth trajectory in fear-filled times
• The distressed real estate saw a great surge in interest from higher net worth individuals as well as individuals — a domino effect from the prevalence of lower interest rates in the market coupled with the decrease in the price of the available units
• Investments in emerging economies such as Nigeria acted as a great risk diversifier for those with the financial backing to do so, and opportunities acted like a start of a new chapter in the line of investments

But with cash in hand being a dire requirement at this point of time, it wasn’t a walk in the park for those individuals who had invested in funds having lock-in periods. Investors had millions locked into funds that had contract-based withdrawal periods exceeding three years, leaving them with no option but to watch them depreciate. Furthermore, the inclusion of management fees made investors realise that they were losing even though the market didn’t perform well. This created a huge gap in the products offered in the market for such UHNIs who might’ve needed a more client-aligned, open-ended fund.

Non-traditional avenues emerging with diversification as a viewpoint

• Uncertainty in the global economy and the printing of money brought up the narrative of an alternative decentralised currency that led to cryptocurrencies such as bitcoin gaining tremendously, and investors converted their personal assets to act as a hedge
• Another trend that was inspired by the acquisition of debt-ridden and discounted companies was special purpose acquisition companies (SPAC). SPACs have been shown great interest by UHNIs who understand the potential of such vehicles to gather large gains in the long run.

The writer is co-founder and CIO of investment firm True Beacon and online stock trading platform Zerodha

The thoughts and opinions shared here are of the author.