The Covid-19 pandemic has been declared as a black swan event by most economists and finance experts. Typically, a black swan event is one that strikes all of a sudden and leaves a lasting negative impact on the economy that is hard to overcome. India has had an exposure to such irrepressible and volatile situations in 2007-08, when the global economy went spiralling down with the crash of Lehman Brothers. In recent times, demonetisation has also led to a major setback for the Indian economy. But the current mayhem caused by the novel Coronavirus pandemic is unprecedented and its impact is still unfolding. It is now apparent that Covid-19 will leave a far deeper wound on the economy that would take years to heal. According to a recent IMF report, the Indian economy will contract by 4.5% in FY21. The pandemic has struck across industries—manufacturing, real estate, aviation, tourism, and banking. What derailed the economy the most was the lockdown and the mass exodus of migrant workers from cities to villages. While the stock market is slowly stabilising, the signs of true recovery are nowhere in sight.
The lack of a definite timeline has made this situation even more precarious. Such historic events have always caught the world economy off guard as no one could have ever predicted such an outbreak. However, businesses should have the foresight and a plan to withstand such turbulent times. A ‘worst-case scenario plan’ is something that every businessman or high net-worth individual (HNI) should consider to navigate through such catastrophic strikes. This plan should be made after taking into consideration what the business needs in order to stay afloat if the situation continues over a longer period. Cash is king and will always be and, hence, companies should build up reserves so that they can help the business stay afloat in times of crisis. This is also the time to evaluate certain investment assessments and amend them to cushion the downward curve that is usually noticed during such times. It may be worthwhile to measure the risks that investments in certain asset classes bring, and reallocate the investments to those which pose less risk. It is also important to ascertain the short-term and the long-term risks, and take business decisions accordingly.
The one thing that the pandemic has amply highlighted is the uncertainty of life. Keeping this in mind, businesses need to ensure that they have not overlooked this aspect. It has been observed that most businesses put their succession planning on hold during turbulent times and make business continuity a priority over everything else. This could prove to be disastrous for a business as it might land them in a situation where there is no leadership to make critical assessments that decide the future of the business. As a result, businesses are exposed to a much higher risk than before. A succession plan is a must for a business to successfully ride the pandemic wave. It is always important to continue to have strong leadership at the helm of affairs, which can help the business wade through choppy waters.
Another aspect that needs attention during such times is the investment portfolio of businesspeople which is spread across diverse asset classes. With the economy and the markets in free fall, there are chances that millions of dollars of UHNI wealth can get eroded within a few days. It is vital to keep a close eye on market movements and align the portfolio in a way that risk is mitigated and wealth that has been created over a period is preserved. UHNIs have their investments across different asset classes—equities, debt, private equity, seed capital, debt instruments, and real estate to name a few. Some also have a considerable amount of exposure to international markets. The global economic conditions have a direct impact on the performance of each of these asset classes. For example, real estate as an asset class has nosedived since demonetisation, and with the onslaught of the pandemic, it has only got worse. The outlook for this sector does not look positive in the near future. Likewise, SIPs too have not been performing well for the past couple of years, whereas debt instruments have proved their mettle even during times of uncertainty. It is essential to keep an astute eye on these macroeconomic conditions to take appropriate asset allocation decisions. This helps in mitigating risk and ensuring better returns.
The role of a multi-family office (MFOs) has been constantly evolving over the past few years and it has taken on a whole new meaning during these turbulent times. As a trusted adviser and custodian of wealth for UHNIs and business houses, it plays an important role in safeguarding their wealth in good times and bad. It is their job to study the global economic situation, assess the risk, reallocate the assets and ensure that the wealth creation process does not get hampered by any external events that may be within or beyond control.
Today, MFOs offer a multitude of services that are inclusive of, but not limited to investment management, business advisory, CFO services, philanthropy, real estate, and succession planning. Since MFOs handle a very limited number of clients, their services are very personalised. Their buy-side and institutional approach to investing is guided by deep research and this has made them popular with large family businesses.
In today’s complex and uncertain situations, having a good MFO taking care of your family’s fortune has become an important aspect of safeguarding your wealth year after year.
Views are personal. The author is principal founder and managing director of Entrust Family Office, a boutique investment advisory company.