The long-term outlook for the well-managed banks remains strong, though the near-term could be challenging even for these
Insurers have been risk-averse and have not taken any significant credit risks in their investment portfolios, says Shyamsunder Bhat, CIO, Exide Life Insurance. In a conversation with Moneycontrol’s Preeti Kulkarni, he gives his opinion on the economy, markets and the investment strategy of the insurance company. Excerpts.
Has Exide Life – and the life insurance industry – witnessed panic surrenders?
To the best of my knowledge, our industry has not witnessed panic surrenders. To the contrary, there is a possibility that surrenders could actually be lower due to the sharply lower market levels, and the long-term perspective of our industry and our policyholders.
Which are the sectors you are betting on this financial year?
Our large sectoral weights are in sectors such as the financials sector (largely select private sector banks), oil & gas, telecom, IT, FMCG and pharmaceuticals. While financial services is the largest sectoral weight, our weightage is lesser than its weightage in the Nifty 50. Ditto for FMCG: a large weight, but lesser than in the benchmark, due to stretched valuations. We are relatively overweight in a combination of oil &gas plus telecom, and on pharma. We are neutral on IT.
What is the mid to long-term outlook for banks and NBFCs, given that the COVID-19 impact and resultant pressure on corporates and individuals could lead to asset quality impairment in the coming days?
The long-term outlook for the well-managed banks remains strong, though the near-term could be challenging even for these. Within NBFCs, even the stronger ones could face near-term challenges, particularly on the asset-liability management front, due to the moratorium extended to their borrowers while not being able to avail of the same from all their lenders. For banks as well as NBFCs, asset quality impairment is an eventual possibility to a varying extent, unless the situation improves substantially.
Is pharma of particular interest now due to the COVID-19 fallout? What are the factors responsible for turning around pharma stocks’ fortunes?
We have generally been overweight on the pharma sector, though the weightage may not be very high in absolute terms considering its modest weight in the Nifty 50. We remain positive; however, we consider the recent sharp rally in pharma stocks to have largely factored in the renewed growth prospects in some of these companies. There are some expectations that the USFDA’s decisions may not be as stringent as in the past; however, we do not expect this to be necessarily the case. What could happen though is that that decisions on specific formulations that are in short supply may be expedited.
Did Exide Life have any exposure to YES Bank’s AT-1 bonds? What would be the aggregate exposure of the life insurance industry to these bonds?
No, we do not have any exposure to any bonds of Yes Bank. The life insurance industry’s exposure in its AT-1 bonds, too, could be limited.
Will the YES Bank AT-1 bonds episode, along with the recent one involving sub-AA-rated bonds, make insurers more risk averse in the future? How do you plan to assuage investors’ anxiety?
Insurers in general have been more risk averse because we have to follow the stringent IRDAI guidelines. Safety is paramount for investments in the insurance sector, and a major part of the debt investments are in government securities. The exposure to bonds rated below AAA would be much lower in the insurance sector compared to what you see in the mutual funds space, so such crises will not have a significant impact on the life insurance industry. Investors’ anxiety has been particularly high in credit risk funds category in the mutual fund sector; we do not have such funds in the insurance sector.
What will your investment strategy be this fiscal?
Earlier in this calendar year, we had reduced our weight in equities in our hybrid funds, after having been overweight for an extended period. The concerns were more on market valuations, in the context of uncertainty over growth and corporate earnings, and our view was that it would be difficult to sustain the high level of valuations in the absence of growth. The expectations on earnings growth have now been pushed forward by one full year, with FY21 likely to be only a flattish one in terms of corporate earnings, assuming a return to normalcy in a couple of quarters. We would await stock-specific lower levels for adding to the equity exposure, particularly in light of the recent bounce-back. Within equities, we have around 80 per cent in large-cap and 20 per cent in mid-caps, and we may be continuing with the same.
What would be your advice to investors at this point in time? Investment horizon for investors should remain long-term, ideally over five years. They should neither panic during sharp market falls, nor to become too optimistic during equally sharp rallies. There could be intense two-way volatility, and we have already witnessed two months of this market behaviour. Existing investors in insurance policies should continue investing their renewal premia. Also, the importance of an adequate insurance cover is felt even more, in the present uncertain scenario.
What are the challenges you foresee this fiscal?
On the macro front, there are some factors in our favour. The interest rates are much lower, and the RBI has been trying innovative means to enable a transmission of the same. At higher borrowing levels for the Government too, the present low interest rates are helping prevent a substantial increase in interest outgo. Inflation and crude oil prices are the other two macros that are in favour. While our currency has weakened, the fall in oil prices has been dramatic, so to that extent, there is a cushioning impact on the otherwise-stretched fiscal deficit.
However, there is no denying that there could be significant growth concerns in the present year in corporate India; as the present focus is more on conserving/raising capital, and there could be demand-related issues. However, if one sees beyond the present year, some segments of the Indian economy could emerge stronger, particularly the ones which have the potential to be large alternative sourcing bases as customers may look to diversify from China. This has already started, but will gather more pace once the dust settles.
While stock prices are lower than the levels reached earlier in the year, it is important to note that the valuations are not necessarily lower, particularly due to the likely impact on earnings in the present year. Our approach would continue to be stock-specific, and the challenge presently is that, in the few sectors which are likely to see a growth, the valuations are not favourable. We would continue to closely monitoring the stocks from a risk-return perspective.