The problem lies in creditworthy borrowers not wanting to borrow and banks not willing to lend, ICICI Lombard GIC Investments head Gopalakrishnan S tells Puneet Wadhwa. Edited excerpts:
Given the recent turmoil in the markets, what are the chances of a third round of quantitative easing (QE3) in the US?
We see no lack of liquidity in the financial system. We saw the impact of the QE1 and QE2 on lower tier consumers, with higher energy and food costs that followed from the commodity bubble. It also resulted in an increasing mistrust in the monetary system, resulting in gold and other precious metals appreciating significantly. The US Federal Reserve (Fed) hardly achieved its goal of further reducing mortgage rates, to aid the distressed homeowners. Monetary measures do not work beyond a point. The problem lies in credit-worthy borrowers not wanting to borrow, and banks, out of fear and regulations, not willing to lend.
Successive QEs can lead to moral hazard problems in the financial market. Options are being discussed, including the Fed reorienting its treasury portfolio to longer maturities, without enlarging its size, so that the longer treasury rates are kept low and they help housing in consequence. This, too, may have unintended consequences, as a flatter yield curve would pose problems for the banking system. In the current de-leveraging cycle, a more specific fiscal measure would be more appropriate, than any further monetary easing.
Has there been a change in your investment strategy, in the wake of the volatile market conditions?
We are value-oriented investors, with a contrarian bias in our approach. So, we avoid crowded trades in the market and play no role in any momentum in the market. Our investments are positioned to face the current market conditions. We reduced our allocation to riskier assets almost a year and have been maintaining it that way.
Are you fully invested at current levels? Do you see value emerging in any specific sectors/stocks at current valuations?
We have no fixed allocation to a particular asset class at any point in time. We are driven by our ability to assume risks and by the opportunities present in the marketplace, with due consideration for associated risks. We have the potential to increase our equity allocation, when opportunities are present. We see select opportunities in interest rate-sensitive oil and gas sectors (both up, as well as downstream) and in stocks at or below cash and cash equivalent, available due to short-term concerns.
Do you advise investing in debt in the current scenario, or can one start bottom-fishing in equities? How should one structure their portfolio?
There are opportunities in the debt market. The current long bond yields imply market extrapolating the current inflation persisting till maturity of those bonds. This offers an opportunity to go long on bonds. One should consider increasing exposure to long-term sovereign bonds and high quality corporate credits. Equities exposure should be based on one's risk taking abilities. Having said that, it is no time to be loaded on to equities to one's full potential.
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The government plans to relax equity dilution norms for insurance firms. What are the implications of this, for the insurance industry?
Insurance penetration has a long way to go in India and the industry can meaningfully deploy capital in the times to come. So, any relaxation on dilution norms is more than welcome. However, the potential unlocking of valuation would be present only if limits on overseas investments are lifted.
Without the overseas investors, one significant section of investors would be left out and this would make this sector less attractive. To begin with, there should at least be a level playing field with other financial intermediaries in respect of access to capital.
