After a long wait, the mutual fund industry is expected to break all its previous records this calendar year, feel experts. With the hope for government reforms and improved macros, investors are now pouring money in equity schemes making them hit all-time highs. Speaking to CNBC-TV18, Sashi Krishnan, CIO, Birla Sun Life Insurance reiterated that strong retila interest is coming back to insurance and mutual funds.
Krishnan is overweight on banking and financial sector. Among other sectors, he is bullish on pharmaceuticals and IT. According to him, approvals will come for pharma companies in the next few quarters which will boost growth in the sector. Also, IT growth will be led by improvement of business prospects in the US market, he added.
Going ahead, Krishnan is also likes downstream oil and gas companies due to severe fall in crude price to below USD 80 per barrel level and change in subsidy regime for the companies comprising the sector.
However, he is worried about the fiscal concern which may force the government to cut down on spending to meet its target. Below is verbatim transcript of the interview:
Q: For last few days, I was just pondering over the domestic institutional investors (DIIs) data. There has been quite a bit of selling from the domestic insurance companies. What is the reason for that? Do you get a sense that the valuations have inched up and that is why some domestic money is taking a bit of a backseat or could this be something related to a particular company like LIC and that could be getting reflected in the stats?
A: It would be both. Valuations have moved up quite a bit and therefore, there is some reason to sell because of these expensive valuations. However, on the whole, we are seeing retail interest coming back in a very strong way in both insurance and mutual funds.
Domestic institutional investors are actually seeing money coming back into them and that is because there is a change in sentiment that retail investors are exhibiting at this point of time and there is more money moving out of physical assets into financial assets.
The bottomline is that if you look at how financial assets especially equities have behaved over the long-term or 20-25 year period, they have outperformed most other assets that retail investors can access.
Gold has given you 5 percent CAGR over a 25-year period, equity has given you a 15 percent CAGR over a 25-year period and now people are understanding that over the next 15-20 years asset markets will help them create wealth. We are seeing that movement.
So, you may have specific pockets where domestic institutions selling, you are seeing a change in retail sentiment and more money coming into both insurance and mutual funds.
Q: What would your portfolio comprise of in terms of sector allocation at this point, what sort of weight do you currently have?
A: Our large weight is to the financial sector; the banking and finance sector. We have almost 27-28 percent of our exposure in the banking and financial sector. As growth comes back, this sector will do extremely well.
If we see the gross domestic product (GDP) growth going up to 7-8 percent then credit growth will jump sharply from where it stagnated at close to 11 percent to something like 15-16 percent and that will be one big trigger for the banking and financial sector.
The second big trigger will be the fact that as capital markets improve, there will be a big opportunity that a lot of the banks will have to deleverage to improve the asset quality in their books.
Improving capital markets would mean that over leveraged corporate borrowers will be able to deleverage, they will be able to get an opportunity to get a lot of their stalled projects working again which would mean that they would be able to service a lot of borrowings that they have from the banks and they will be able to exit a lot of assets which – improving business sentiment will help them too.
You will find a lot of improvement in the impaired asset positions of banks because impaired assets were a very big issue with banks especially the government-owned banks with impaired assets being more than 10 percent of the total book. So, that sector will do very well as the economy recovers.
Lastly, if interest rates fall, these will be the first big beneficiaries because not only would it mean that their trading book would do better but it also means that credit would pick-up and impaired assets will improve as interest rates come down. So, we have a fairly large exposure to that.
The second big sector that we have exposure is to some of the export themes which will continue to do well like the pharmaceuticals and the IT; specific companies in that sector. In the pharmaceutical sector we see US being a very strong market, we have seen 3.9 percent growth there.
In the next two quarters we will see a lot more approvals coming out of the US which means that there will be a lot of new introductions that these pharmaceutical companies will be able to make in that market. That is a sector we think will do well.
The pharma sector has got an added advantage that you have seen domestic growth as close to 18-20 percent and some of them in the domestic market have been able to take price increases which is another big opportunity.
IT sector, specifically because of the fact that US is doing well and the fact that you got a new visa regime that is coming up which will be very helpful to them. We do see a lot of improvement in the business prospects of such companies. So, we have a fairly large exposure in these two areas.
Q: How would you approach the oil and gas space in particular? We have this fairly large Oil and Natural Gas Corporation (ONGC) FPO that will now come up and we have seen fair bit of run up in oil marketing companies (OMCs) for good reasons, how would you approach them?
A: If you look at the oil and gas space, the big opportunity there is the downstream company because oil prices are below 80 and that is going to be a big kicker. However, you will see a big change in the subsidy sharing regime which will improve the quality of earnings that you have for downstream oil companies. Therefore, the opportunity is in the downstream oil companies.
Having said that, in the gas space whatever rationalisation they have done in gas pricing, doesn’t excite at this point of time. However, there will be more rationalisation as we go forward and that is a space we will have to keep looking at carefully.
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