Even as prospects of the stock market rising to fresh highs in 2013 bring cheer to many on Dalal Street, fund managers at domestic insurers fear another surge in the markets next year would force them to buy stocks at steep valuations, as they had sold through most of this year, when the benchmark Sensex rose 25 per cent.
Insurance fund managers fear stock purchases at high levels would limit the scope for upsides, as the market is considered ‘fairly valued’, considering the price-to-earnings ratio. The concern is greater among fund managers at private insurers, which have corpuses much smaller than that of Life Insurance Corporation (LIC), the country’s largest insurer. These insurers might find it difficult to stick to a particular investment strategy, which is usually ‘sell on rise and buy on declines’.
So far this year, insurers, the largest category of domestic institutional investors, sold net shares of about Rs 36,000 crore, while foreign portfolio investors bought to the tune of Rs 1.26 lakh crore. In the same period, mutual funds sold shares worth Rs 20,700 crore.
Domestic institutions sell when their foreign peers buy and vice-versa.
| BIG CORPUS, LARGE PLAYGROUND | ||||
| Year | Net equity investment (in Rs cr) | YTD Returns % | ||
| Insurers | FIIs | MF | Sensex | |
| 2010 | 6,269.12 | 1,33,048.60 | -27,845.80 | 17.43 |
| 2011 | 25,169.64 | -3,417.60 | 6,268.00 | -24.64 |
| 2012* | -36,737.92 | 1,26,676.50 | -20,756.00 | 25.03 |
| *Till Dec 24, 2012 for FIIs and Dec 20, 2012 for MFs and Insurers; Figure in bracket for 2012 for insurers indicates that they sold equity of that amount *Sensex till Dec 27, 2012 Data Source- Sebi, Exchanges, Morgan Stanley Compiled by BS Research Bureau | ||||
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“Investors, including insurance companies, are cashing out because of the healthy returns this year. Also, there is a certain amount of risk aversion,” said Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance. According to Morgan Stanley, this year, insurance companies sold stocks in nine of the 12 months.
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While most insurers sold to book profits, as they had bought aggressively last year, LIC sold to participate in the government’s share sales. “We have been very traditional in our investment strategy (buy at lower levels and sell on highs). We operate according to the market condition at that particular juncture,” a senior LIC official said on condition of anonymity. “We sold when the market was high. Moreover, we have been involved in areas like disinvestment and have, therefore, increased liquidity by selling equity for this purpose.”
LIC, which receives about Rs 2 lakh crore in premiums every financial year, said it rarely faced redemption pressure, a problem other insurers claimed was a reason for selling. “Most insurance companies are selling, as they are staring at redemptions,” said Prashant Sharma, chief investment officer, Max Life Insurance.
The LIC official said the continuous flow of premium money every year would help the company stick to its age-old investment strategy in 2013, too. “Nobody has ever caught the market when it is at an all-time high or an all-time low by design. Nobody actually knows what would happen to the market next year. But we are ready with our ammunition to sell next year,” the official said.
So far, most foreign investment banks such as Goldman Sachs, Morgan Stanley and HSBC are betting on further upsides in the nation’s benchmark indices, owing to sustained inflows from foreign institutional investors. While Morgan Stanley expects the Sensex to rise about 20 per cent to 23,079 by December 2013, Goldman Sachs feels the Nifty would rise to 6,600-levels. Murray Gunn, head of technical analysis at HSBC, said the Sensex could touch 25,000 next year.
On Thursday, the Sensex closed at 19,323.80, while the Nifty closed at 5,870.10.