Recent times have been very turbulent for Indian equity markets and the Rupee, both of which have seen high volatility and a fall from levels seen three months ago. This is consequent to worries over start of QE tapering in the US, weakening economic environment in India and slowing corporate growth. In an interview, Manish Kumar, EVP & Chief Investment Officer, ICICI Prudential Life Insurance spoke to Vishal Chhabria on the worries playing on the minds of market participants, how these could be resolved and his investment strategy. Edited excerpts:
Since last September, as a country we have taken enough measures, but we are back to the same level for equity markets, rupee, etc. There is obviously something really troubling the markets. What needs to be done to restore confidence?
There were certain structural challenges and deficiencies in the economy, which were only getting bigger, like, the high trade deficit, which was conceding to high current account deficit (CAD), as well as the fiscal deficit. As India continued to attract capital inflows in the past, these weaknesses were not visible. Ever since the US Fed has announced that there is a likelihood of tapering of Quantitative Easing (QE) that liquidity suddenly shrunk. As we are running a huge CAD there is a natural tendency for the currency to depreciate. As foreign investors in Indian markets see their wealth getting eroded in terms of dollars, they start pulling out their money. This gets into a vicious cycle of money getting pulled back and currency weakening further.
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We need to address the CAD very quickly. Lot of measures have been taken, and my sense is, incrementally on a year-on-year basis, you will start seeing lower numbers on CAD. In fact, in July, it was a fairly good number. Secondly, we need to do something to reverse the negative sentiment and improve the investment climate. It is extremely important for the investment climate to be attractive and to get investors to start thinking positively about India. There are a lot of projects that have not got approval for various reasons. While the government has cleared some and work on a few projects has commenced but probably that has not been articulated fully by the government. It is going to take a long time to build confidence, but that is extremely critical. Once that happens, it would make foreign investors start looking at India favourably. This could lead to resurgence of much needed capital flows and bring stability to currency.
It is also important to understand that most other emerging markets or economies are also going through lots of challenges viz. China, Brazil and Russia. As these countries are producers of commodities, India would actually gain from compression in commodity prices. So, India is in a slightly better position for attracting capital flows, if it can get its act together.
What can the government really do to correct the structural issues?
There are some steps that they need to take immediately. Creating a healthy climate for inviting investments is imperative, which can be possible only through a stable policy regime. Companies have invested lot of money in projects that were backed by resource blocks allocated to them. Ensure speedy clearance of those projects with access to the allocated resource blocks so long as the basic principles on the basis of which they were allocated are adhered to.
Liberalising FDI norms is a welcome move. There are a lot of areas, where we are witnessing a lot of imports. We need to encourage those industries to create domestic infrastructure for manufacture of some of those items, like for example, we are importing mobiles, air conditioners, televisions and most of the luxury cars. We can actually leverage our population strength to provide an impetus to the manufacturing sector for these items, we might have to purchase the technology for that, however, it will benefit us in the longer term.
The other side is exports. For long, India has remained an exporter of gems, jewellery, textiles, and so forth. It is time for us to emerge as an exporter in many other sectors. We are seeing some signs of that like the case with auto. We need to encourage that. Encouraging exports, domestic manufacturing, promoting import substitution, attracting investments by creating a stable policy regime; all these things will go a long way in addressing some of the structural problems.
In the 90s too RBI had imposed controls only to roll it back in a couple of months. How long will the recent controls imposed by RBI remain in place?
It is difficult to assign a time frame, but, one thing is sure that these measures are not permanent. One of the signals to watch out for is whether the currency becomes stable. Due to the steps taken by RBI and the government, if they are actually able to reduce the trade deficit and attract some investments, then at some stage, you will start seeing things reversing.
Since markets start discounting the news in advance, to what extent is news like QE tapering factored in?
Typically, some of these events get factored in two stages – once, when the news comes and then when the actual event happens. So, the first part has been fairly well discounted. The news has sunk in well that the tapering will happen, and the behaviour in the currency/bond/equity markets is largely a consequence of what has been factored so far. When the event actually happens, then once again we may see some kind of turbulence.
We have seen the consensus Sensex earnings been downgraded since the results season started. Do you think this downgrade cycle will continue?
As one entered the year, it was quite obvious from the growth momentum of the economy that a 13-14% earnings growth is not going to be possible. We had been saying that this is a year of single-digit topline growth and in the best case, single-digit bottom line growth. A lot of us could see what was coming, but perhaps some of the analysts had not envisaged it going downwards so much, and that is why initially it was projected as a 13-14% growth. So, if this kind of an environment continues, possibly one more round of earnings cut cannot be ruled out.
Recently, crude oil prices have gone up and with the weak rupee, how much of a risk is it?
High crude oil prices combined with a weak rupee can be a dangerous combination for the country and this is definitely playing in the minds of the investors. But, with both China and India slowing down, and as the higher crude prices are gradually passed on to consumers, there would be a demand pullback which can cause oil prices to come off. Today, the crude prices are running high because of geopolitical reasons and not so much due to the demand-supply dynamics. Hopefully, as and when these issues are ironed out you will see the prices correcting. However, as of now it remains a source of worry.
How are you working out in terms of investment strategy?
As a life insurance company we have access to long term funds. This enables us to take deeper calls with focus on quality. On the fixed income side, 95% of our investments are either in government securities or in corporate bonds rated AA+ and better. Managing the duration is an important part of our strategy; in the last three months, we have been running lower duration than that of the benchmark and that has actually helped us.
In Equities, the mantra of quality remains, and then we take a combination of structural and certain tactical calls. There are certain structural calls that have worked for us; for example, the private sector banking space and in that we have been largely invested in those banks that have superior liability franchise and have higher exposure to retail segment. We have also been positive on telecom, technology, pharmaceuticals and automobiles and that has worked well for us.