Friday, October 30, 2009

ICICI Pru has a long-term 'buy' call on mkts

The market rally in the last few months — on the back of immense liquidity — may have made some stocks and sectors looking valued, but insurance companies like ICICI Prudential have a long-term buy call on the stock markets, its CIO Puneet Nanda says.
“Insurance companies tend to take much longer calls on the market,” Nanda told CNBC-TV18 in an interview. “On the margin, if I see most of the macro data is positive compared to where we were six months back. So to that extent it does make sense to invest for long-term investors. As things come within our comfort zone in terms of valuation, we will keep on investing,” he said.
Here is a verbatim transcript of Puneet Nanda’s exclusive interview on CNBC-TV18. Also watch the accompanying video.

Q: In the last couple of days insurance companies have started deploying cash just as well you being doing that using this fall as an opportunity?
A: Insurance companies tend to take much longer calls on the market. The sharp rally seen over the last couple of months, in fact last three–four months, has been largely due to two factors. One is tremendous liquidity available globally which has obviously led to greater risk appetite and second is the hope of the economic recovery.
Over the last few days, we have seen that there is some correction because at some stage people would want to take profit and also at some stage people will want to see a real data on whether or not economic recovery is happening.
As far as insurance companies are concerned, we do tend to take longer calls rather than pure liquidity based calls. On the margin, most of the macro data is positive compared to where we were six months back. So to that extent it does make sense to invest for long-term investors, of course, the liquidity-driven rally would have led to some sectors or some stocks perhaps looking a bit richly valued. As things come within our comfort zone in terms of valuation, we will keep on investing.

Q: The first meaningful knock to our market actually came on policy day. How worried are you about the rate tightening now having begun and how would you approach some of the rate sensitive?
A: The fact that the Reserve Bank of India (RBI) would start the exit policy on the monetary side was well-known. So I do not think that has caught anybody by surprise. So if anything, the direction actions, they have still resisted. So they have started some of the things which perhaps are no longer relevant. For example, liquidity support to some non-banking sector. Also, perhaps, they have started doing some things which do not have a very significant immediate impact for example, statutory liquidity ratio (SLR).
So I do not see anything being a surprise in the monetary policy as such. The second factor is that as far as interest rates are concerned, I would say the fact that interest rates have to tick up in the medium-term was expected and is known. So from my perspective, it’s only a question of timing and sequencing of events that one needs to worry about.
I think over the next year or so interest rates will tick up marginally. It may be preceded by RBI trying to tighten the domestic liquidity; they have given enough indications to that effect. However, the most heartening feature for me is that not just RBI, the policymakers in general, are completely focused on the growth paradigm of the country. They have done an admirable job over the last one year or so on this front and as long as they are able to maintain that balance I think things will be okay.

Q: How much investable cash do you yourself have at this point and between the industry, the insurance sector how much investable cash do you think is lying to come into equities?
A: Over the entire FY08–09, the life insurance sector invested somewhere between Rs 50,000–60,000 crore into equity on a net basis. For the first half of this year, the net investment has been relatively muted somewhere around Rs 13,000–14,000 crore. I expect that for the full year, the net investment this year will turnout to be more than last year. So on that basis it is fair to assume that there will be significant investment in equities by Indian insurance companies in the second half of the year.

Q: Even a ballpark figure of what that figure could stand at?
A: Last year the figure was something like Rs 55,000 crore, this year thus far it is somewhere around Rs 13,000–15,000 crore. So looking at the difference between the two one will get the number, and in fact I expect to exceed that number.

Q: So Rs 40,000–50,000 crore in the next five months?
A: I would not rule it out and also let’s remember that retail risk appetite comes off slowly as well as comes back slowly. Last year it took a while for the retail risk appetite to come off, similarly this year retail risk appetite is only gradually returning now. So a combination of the fact that second half anyway tends to be very strong for insurance for a number of reasons and the fact that retail risk appetite is returning albeit gradually, will result in the kind of numbers that we are talking about.

Q: Any reason though why things have moved in the opposite directions for you guys versus the mutual funds? Just this month you have put in under Rs 5,000 crore and they have pulled out more than 6,000 crore?
A: I do not know what’s happening on the mutual fund side. On the insurance side the pace of inflows is picking up. More importantly, as market corrects and people feel, including us a lot of insurance companies feel that valuations are becoming in the striking zone money will flow in because at least in life insurance there is enough liquidity. It is more a question of our view on the markets.

Q: Two big institutional favourites––telecom and capital goods––have disappointed the market. How have you approached both those sectors?
A: On capital goods my view is that next year it will turnout to be much better than what we are seeing now because the cycle there turns out to be much longer than in a lot of other sectors. So currently we are seeing a lot of investment plan. If you will talk to bank you will realise that a lot of approvals are falling in place, the sanctions are falling in place but the actual outflow is not happening. So perhaps a lot of that will fructify in the next year, and broadly, if we feel and I think there is general consensus that in terms of the very economy is going of course we have weathered the storm very well. However, next year we will definitely be better than this year. So putting those things together I am reasonably optimistic on the capital goods sector for the next year.
Telecom is a mixed bag for a number of reasons. There are some fundamental factors and there are some technical factors. The price war has kicked in that was perhaps the biggest reason for the sector to underperform and there are a lot of corporate events. Broadly, domestic consumption has stood the test of time. In this quarter, the results that have come so far, I am talking about telecom specifically but a lot of domestic consumption sectors like autos or even on the banking side things are reasonably in good shape. If anything, I think a lot of concerns on weak monsoon have been mitigated because of these results. So I would say telecom will turnout as a sector perhaps a market performer, within that, of course, we will have to see company by company what’s happening.

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