'We haven't seen the end of problems yet'

SMART TALK/ Prasun Gajri

The role of insurance companies in the Indian equity market has substantially increased over the past several years thanks to ULIPs (unit linked insurance plans). For example, in FY08, Indian life insurance companies invested roughly Rs 55,000 crore and more than 95 per cent of this amount came through ULIPs.

The combined investments of foreign institutional investors (FIIs) and domestic mutual funds were to the tune of Rs 69,000 crore in the same period. Thus, there is no doubt that the insurance companies have become significant players in the market.

In a bid to know their view on the market and its outlook, Priya Kansara talks to Prasun Gajri, chief investment officer (CIO), Tata AIG Life Insurance Company.

Tata AIG has about Rs 3,800 crore worth of assets under management including traditional funds. He shares his opinion on the outlook for India, his investment style and the sectors he prefers for consistent return. Excerpts.

What is your opinion on the current market conditions? How long do you think the volatility will continue?

If one looks at the market for next three to six months, it is certainly confusing. I don't think anyone has a clear idea about where the markets are headed in the short to medium term. There are lot of factors"�domestic and global"� which are affecting the sentiments currently.

I think the volatility will continue for some more time as we have not yet seen the end of the issues such as subprime, higher food prices and inflationary pressure. Also, we are going to have elections in the first half of the next year, which may add to the volatility.

How much of pain is left in the global context?

There is still a lot of uncertainty in the market. We have not seen the end of the world's financial problems. US banks continue to make losses and none of them have still stated that this is the end of the problems.

So, I think we have probably seen the worst of it but not the end of it. This end could be three, six or even twelve months away. The issue is whether the problems will extend from the financial sector to the other sectors.

What is your long-term outlook for India?

Our view on India continues to be positive for the long term. Even the most pessimistic of analysts peg the GDP growth in the range of 7.0 per cent to 7.5 per cent. This in absolute terms is very good. There are a lot of stocks available in the market at reasonable valuations and things look even better if say a two to three year horizon is considered.

However, the markets may not necessarily perform in the next 3-6 months. We may have to live with the pain of volatility and some underperformance, which I think is the small price to pay for long term out performance. If you take the horizon of say ten years, the picture is still robust.

The outlook for none of the India's key growth drivers such as the demographics, consumption demand, infrastructure spending, corporate investments and India's competitiveness in terms of intellectual capital, labour and skill has changed. These are the factors which will drive the long term growth.

How do you feel the current year is going to be for India Inc?

There will definitely be some slowdown. The earnings are growing off a larger base and higher interest rates and structural bottlenecks could lead to delay in project execution.

Also, due to upcoming elections next year, we feel that orders by the government may pick in the coming quarters and then see a slowdown in the first half next year.

How do you view the results so far?

The results have been a mixed bag so far but haven't been very surprising. No major shocks on the either side so far.

What is your outlook on inflation and interest rates?

Inflation is the single biggest dampening factor in the current scenario. Though we believe that it will cool off a bit after monsoons and higher expected food grain production this year, it will still remain in the range of 5-6 per cent until the time the structural issues like supply constraints are worked out.

The supply side takes time to set right and as we see more investments in core areas like refining, mining and agriculture, things will start looking up.

Obviously, this will take a longer time and will not happen overnight. Consequently, interest rates are also expected to remain firm till the time inflation is brought under control.

What is the average market return one should expect?

Assuming a nominal GDP growth of 12.5-13 per, one can expect corporate earnings to grow at an average 15 per cent over a longer period.

Assuming current multiples are close to fair, one can expect a 14-15 per cent return from the market on an average. The main assumption here is that Indian growth story continues and currently there are no reasons to doubt that.

What is your investment strategy?

We have bottoms-up and stock specific approach. For this, we have our internal rating systems, which classify stocks on certain parameters both qualitative and quantitative. Our analysis is based on pure fundamental and we take medium to long term calls.

Are you particular about market capitalisation of the companies you want to invest in?

Rather than market capitalisation, it is the liquidity in the counter, which matters more to us. But yes, typically we look at companies with a billion dollar (Rs 3,500-4,000 crore) market capitalisation.

How often do you churn your portfolio?

We don't generally churn our portfolio very often. We are long-term buyers and are hardly on the sell side. Even in the current market conditions, we are net buyers every single day. We are holding some of the stock for the last four years"�the time when we started off and 60-70 per cent of our portfolio is similar to what it was when we started.

How many stocks do you generally plan to have in your portfolio?

We tend to keep a large diversified portfolio with around 40-50 stocks. Investing in these many stocks helps us diversify our risk and helps us to achieve good long term returns with lower volatility. Our funds are made up of premiums from a large number of retail investors.

The main aim of these investors when they buy our policies is to get good returns over a long period of time and such customers will not want too much of volatility. We do not believe that a very concentrated portfolio is suitable for our kind of funds.

What are the sectors you prefer from a longer term perspective?

From a longer term perspective, we are bullish on the core sectors as the infrastructure spending in India is expected to be robust. Thus, we like capital goods, construction, and engineering and financial services sectors.