Equity markets may well be trading at near all-time highs but the rally is taking place only in select stocks. Mihir Vora, chief investment officer, Max Life Insurance, shares his thoughts.
The equity markets are at very high levels. Do you think it is a good time to invest in the markets or should one wait for a correction?
Markets are at near all-time highs but there is great polarisation of returns within the market and the benchmark. Stocks which are perceived to have visibility of earnings growth have been bid to extreme levels while those out-of-favour have been beaten down to yearly lows. The Nifty is held up by only eight stocks and it has become more acute in the past six months. This is seen in the large-cap benchmark stocks as well as in the mid-cap and small-cap segment. Mid and small-caps have corrected quite a lot and given up 2-3 years of outperformance versus the large-caps.
On the positive side, profit and growth numbers for the June and September 2018 quarters will be quite robust, given the low base of last year. The key to markets for the next few quarters is whether this momentum will sustain through March 2019. Valuations on an aggregate are still on the expensive side. Markets should consolidate and digest the global news flow on multiple factors viz. a) oil b) Chinese currency c) rising global yields d) trade and tariff issues. Locally, consumption and government spending look robust and should continue to be the growth drivers, continuing the trend that we have seen for quite some time.
What will be the impact on stock markets if there is an increase in crude prices besides a further fall in the rupee level?
Crude prices, interest rates and the rupee are all very interlinked. If oil prices sustain at current levels, then we should be able to absorb it over a few quarters. However, if prices continue to rise, India as country becomes vulnerable again. Sentiment can change. Insurance products are not so closely linked to stock markets since we have a mix of products — from investment-oriented products to products which offer more protection. However, if markets and the economy do badly for a sustained long period, it may impact the flows.
Mutual funds have been seeing steady fund flow through SIPs which, in turn, is increasing inflows into the stock markets. How about the flows in the insurance segment and their stock market investments?
We continue to see steady inflows due to new sales, renewal premiums and income on existing portfolio.
Like other segments of the financial sector, insurance also saw a sharp increase in inflows after the demonetisation event. The rise this year may not be as sharp as last year due to the high base, but the trend of savings being channeled to financial assets is likely to drive steady growth.
LIC is the largest domestic financial institution in terms of investments in the stock markets. What role do all the private sector insurance firms, including Max Life, play in the market especially when foreign investors are on a selling spree?
As we have seen in the past three years, the size of the local institutions has grown quite significantly. In the past few quarters, the selling by FIIs has been absorbed by the local institutions. Given the improved penetration of insurance and mutual funds and efforts to further improve the same, financial savings should continue to grow at a healthy pace. Moreover, the move by EPFO to increase allocation to equities and the rapid growth of the NPS schemes should further increase sustainable flows to equities annually.
In terms of relative size, FIIs holdings are still three times bigger than local holdings. Over the long term I don’t think that FIIs will remain net-sellers since they also get long-term inflows and they need to make asset allocations. India is a fast-growing economy of a certain critical size and it can absorb large amounts of capital — very few markets and countries offer this opportunity. In the past 20 years, FIIs have been net sellers of equities in only two or three years.
How has been the growth in the AUM of Max Life Insurance? Also, how do you see the growth going ahead?
Our March 2018 assets under management (AUM) were ₹52,683 crore, a growth of 19% over the previous year. Five years ago, we were at ₹20,434 crore, so we have grown at about 21% compounded over five years.
What has been the trend of your stock market investments?
We have seen good growth in our equity exposures. In the ULIP funds, the exposure is as per the fund benchmark allocation and the inflows are invested accordingly. In our traditional funds, we have increased exposure in the past five years. Overall, our equity assets have doubled in the past five years.
SEBI has reduced the individual anchor allocation size in SME IPOs to ₹2 crore from the earlier ₹10 crore. Do you think this will lead to insurance companies also looking at investing in the SME segment?
Given the size of the corpus of the larger companies like ourselves, it is unlikely that there would be a significant allocation to micro-cap stocks. We have been reducing our mid and small-cap exposure over the past year.
