Even as India Inc may report subdued earnings growth for September quarter as well, lower deficits, consistently falling inflation, lower commodity prices and increasing foreign exchange reserves have all set a stage for an economic recovery, believes Shyamsunder Bhat, chief investment officer at Exide Life Insurance.
Bhat, which manages total assets under management of close to ₹9,000 crore, expects pick up in earnings from December quarter and it will be sustainable over the next few years.
While short term outlook for India equity market will continue to be volatile on account of likely foreign outflows due to global concerns, Bhat is bullish on Indian equities compared to debt over the longer term. He is overweight on sectors like information technology and automobiles.
Below are the edited excerpts of the interview:
Q : Insurance players are buying back after five consecutive financial years of selling? Do you think the trend will continue?
A : I think so. It is not just insurance. The biggest buying of course is coming from mutual funds, which have been getting extremely strong flows now for more than a year and which continued in a big way even in August crash. It was the most heartening feature.
The Indian investor instead of panicking in a market crash of August not just continued systematic investment plans but has actually seemed to have invested more.
I think this trend of Indian investor investing in equity directly or through mutual funds or through unit linked insurance products will only gather steam over the next couple of years given the structural shift which we are seeing from physical assets into financial assets given low or negative returns provided by other asset classes like gold, real estate or fixed deposits.
We believe that returns on fixed deposits before tax, which has already come down from 9 per cent for a very prolonged period to 8 per cent, is headed towards 7 per cent by next year.
We are having positive real rate of interest of 2 per cent now for almost a year now with 7 per cent fixed deposit rate and consumer inflation of 5 per cent after several years of negative interest rates. This indicates that the consumers will have higher disposable income which they can either use in terms of spending and/ or investments.
Q : So this means that you expect the share of ULIPs in your portfolio to rise?
A : We have been historically more focussed on traditional products than ULIPs. This has helped us during the period when ULIPs clearly lost favour as an investment product and had become a strict no no because of higher allocation charges in the past and also bad financial market conditions.
Now with changes made by SEBI in terms of much lower charges, improving market sentiments and the fact that investors are getting more and more aware that ULIPs are an attractive option over the longer term, we believe inflows in ULIPs will catch up with mutual fund inflows.
Anybody who had stayed invested in last five years is far better and for newer investors clearly allocation charges are not as hurting as they were three years back. Thus the headwinds till about four or five years back are not there today.
Q : What is your current assets under management size? What is the break up between debt and equity? Are you planning to change the proportion given that rate cuts are on the anvil?
A : Our total assets under management is close to ₹9,000 crore. Out of this, equity portion is in the region of ₹1,600-1,900 crore.
Our ULIP portfolio is around ₹2,300 crore.
We always had ULIPs but we were not focussing incrementally in the last two years. We target 20 per cent of our incremental business to come from ULIPs.
This will also be aided by lower interest rate scenario. Each time there is an interest cut by the Reserve Bank of India, the debt portion of ULIP stands to benefit in terms of capital appreciation as ULIPs are all marked to market and bonds rally in anticipation of the rate cuts.
However the extent will not be the same in the next 1-1.5 years in terms of capital appreciation as large part of interest rate cut has already happened and some part of the expectation is already built in.
For example FY15 saw very strong return from the debt funds because of large capital appreciation which added 5-6 per cent to 8-9 per cent yields on government securities.
In the short term, debt may look slightly more attractive while there is uncertainty in equity as foreign outflows will continue though not because of Indian macros. This means that we may not have very sharp rally.
Q : How much rate cut (if any) do you expect by the RBI in FY16?
A : We expect atleast one rate cut of 25 basis points in this financial year. However it is possible that there could be 50 bps cut as well.
Structurally we are headed to a scenario of reasonably extended period of low interest rates. Or rather we expect them to remain subdued levels over the next five years even if there could be period of slight upticks.
Q : What is your view on Indian equity markets? What is your time horizon?
A : Our average horizon is atleast more than one year. One to two years is what we project for companies.
From one year plus perspective, equity as an asset class would outperform debt. When the dust settles down India will emerge as even more favoured destination than it was.
Macros be it current account deficit, inflation, lower commodity prices, fiscal deficit, interest rates, and foreign exchange reserves have improved. It is micros, which is nothing but growth in GDP and industry capex, has to improve.
Even if the global growth is slowly limping back, capacities that are there have been structured for much higher growth rate especially from China. There is significant overcapacity in China accompanied by slowdown in demand.
So even after a bounceback, commodity prices are likely to remain at lower levels than in the past.
So India is in a very sweet spot for the next few years.
Q : When do you see earnings growth picking up?
A : We see uptick in earnings from December quarter and will be sustainable. This will be the trigger for the next upmove. Initially it will be helped by the base effect as Nifty companies saw a negative growth in earnings in FY15.
June quarter witnessed 1-2 per cent growth in earnings. September quarter will show an improvement over the June quarter but year-on-year it will be in single digits.
In the third and fourth quarter last year, earnings declined 7 per cent and 8 per cent respectively.
Post FY15, we are seeing significant increase in government capital expenditure across sectors like roads, railways, power transmission and distribution and defence. This is the most positive thing to happen and which India is badly in need of.
This will also lead to industrial capex from next year and beneficiaries would be sectors like banks, cement, steel and industrials.
Since the US economy is also on a recovery path and rupee has depreciated compared to last year, the Indian information technology and pharmaceutical sectors would do well. Auto sector will also gain especially commercial vehicle and passenger vehicles.
Also consumption will pick up across items like automobiles, two wheelers, consumer durables next financial year as seventh pay commission will kick in from April
We expect 11-12 per cent earnings growth in FY16 and that to go up to 18 per cent in FY17.
Consumers will have more disposable income due to positive real interest rate, government employees will have the seventh pay commission, industrial capex will also start next year and large part of the interest rate cut would have played out in FY17.
Q : What sectors have you churned in the last six months? What are the top three sectors in terms of holdings?
A : We really take longer term bets and therefore the churn is not high. Last six months we have not really changed much except cut in agro chemicals on account of bad monsoons and companies having global exposure.
We upped our exposure to media sector especially the television media as we believe ecommerce advertising, not only due to competition but also growth of the industry, will slowly match the advertising by fast moving consumer goods companies. We believe media will soon start commanding higher multiples similar to FMCG players.
More than sectoral call, portfolio strategy is mainly bottoms up driven. We don’t start out having sectoral weightage.
Overall, banking is the biggest sector in our portfolio followed by information technology and automobile. We are underweight on banking since we are close to the regulatory threshold limit of 25 per cent. We continue to remain overweight on IT and auto.
Besides these three, pharmaceuticals and industrials also have fairly large presence.
Q : What is the proportion in terms of Nifty and non-Nifty companies in your portfolio?
A : Our universe is CNX 500 but our exposure beyond CNX 200 is very limited. Our Nifty to non-Nifty companies’ proportion would be 75: 25. These 25 per cent stocks must be between stock 51 to 200.
We do not go beyond CNX 500 as there are internal limits. We tend to spread our risk over larger number of companies.
Q : What is the average cash levels?
A : On an average cash levels are generally under 5 per cent say in the region of 2-4 per cent. We do not really time the market because we are not competing for short term returns. Globally, fund houses do not keep very high levels of cash.
We do have up to 10 per cent cash levels in our mandate. I don’t think we have ever gone to that 10 per cent cash levels.
Q : Recently SEBI warned mutual funds against low profile corporate debt papers. Are insurance companies also at risk?
A : Insurance players including us invest very small component below triple A rated companies.
Just as equity investments tends to be in large caps and mid caps and very little small caps, even in fixed income it tends to be in government securities, infrastructure bonds, PSU bonds and small part in credit which is also significantly in triple A for the industry as a whole.
Q : What are your parameters for stock selection?
A : We are focussed on companies irrespective of the industry scenario. Earnings growth is obviously a very prime criterion because India has always been regarded as growth market.
However, there is a challenge here as concentration is more and more narrowing into fewer high growth companies, which are now commanding higher multiples.
A good company may not always be a good investment.