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  • 11 JUN. 2018

    Bond markets are discounting at least two rate hikes: Edelweiss Tokio Life CIO Bismillah Chowdhary

    Private life insurance company Edelweiss Tokio Insurance is looking to increase the duration of its papers based on the future policy decisions by the monetary policy committee, even as the company believes that the  bond markets are discounting up to two rate hikes.

    In an interaction with Moneycontrol, Bismillah Chowdhary, chief investment officer, Edelweiss Tokio Life Insurance, talks about their investment strategy and sector focus. Excerpts:

    How do you view the equity market right now?

    CY18 has been a difficult year for the market. Though Nifty is flat but that does not give the complete picture. The real pain has been in the broader market, mid-caps and small caps are down close to 15 percent and 20 percent respectively. The pain is even more at individual stock level.

    There had been a lot of froth in the mid cap/small space but now stocks have corrected to reasonable levels. Over the next six to nine months, we will have a sideway market  as macro headwinds like high crude price, high interest rate and upcoming election year will outweigh the micro tailwinds of bottoming out of earnings and clean-up of balance sheet among others.
    Are you hopeful of positive headwinds on the stock markets looking at current levels?

    We continue to remain structu­rally positive on the equity market in the medium to long term. The economic ecosystem of India has undergone an extreme overhaul at all levels since the time it gained independence. Reforms such as Aadhaar, goods and services tax (GST), Insolvency and Bankruptcy Code (IBC), Demonetisation, bank recapitalisation and Real Estate Regulatory Authority (RERA) can collectively transform our economy to a faster, robust and more sustainable growth path. I believe that a strong foundation has been laid and we are at an inflexion point.

    When it comes to the bond market, is there a particular segment that you are focused on?

    The interest-rate cycle in India is turning. But the bond market has been ahead of the curve as short term (2-3 years) and long term (10-15 years) yields have already moved up by 130-140 bps and 120-130 bps respectively over the last 9 months. The bond markets are discounting at-least two rate hikes. We like shorter end of the curve much more than the longer end.

    Will there be any tweaks in the duration of your funds?

    For our unit-linked insurance product (Ulip) funds, we were light on duration. Currently, we believe we are at balanced rate, we will look to opportunistically up the duration based on the coming policy meetings.

    For our participating and non-participating funds, we are generally an investor in the long end of the portfolio. We are extremely focused in matching our assets with the liabilities which warrants us mostly to be in the long end of the curve. We do not take duration view on it.

    Several state development loans (SDL) are also on offer right now. Do you see that as a good opportunity?

    SDL is a good asset class for insurance companies as it provides higher yield as part of the mandatory 50 percent government securities investment limit. However the low duration of SDL’s prevent us from usually investing in it, as it will lead to ALM mismatch for us as we have high duration liability.

    Still the current yield hardening and the recent issuances of longer term SDLs (25 years) provides a good opportunity to invest at higher yields.

    The insurance regulator has allowed insurers to invest in Alternative Investment Funds (AIF). Is that an opportunity that you are looking at?

    We as an insurance company cannot invest more than 3 percent in AIF. We keep on evaluating these opportunities and proactively look to invest into these. However, these proposals go into a serious due diligence process.

     Will Real Estate Investment Trusts (REITs) be an instrument that you will look to invest into?

    When REITs come into the market, this could be an interesting proposition to be looked at by the insurance companies. REITs provide us long term assets which helps in our asset liability management considering our longer term liability profile. Securities and Exchange Board of India (Sebi) guidelines mandate REITs to invest at least 80 percent of assets into revenue-generating and completed projects to reduce the risk of such investment.

    What are the sectors that the company is bullish on?

    We like sectors and stocks which have huge runway for growth and lot of white space. At this juncture of our economy, that space is credit and consumption. We like select private sector banks and NBFCs which have been consistently executing on this theme. Given the opportunity size, one may find few of them little highly priced but a company which has managed well through the cycles deserves that premium and will continue to command premium going forward as well.

    However, we avoid investing in sectors which have transparency/corporate governance issues. We also avoid sectors where we don’t expect growth in the long term.

    But we might still choose companies with growth, quality management and effective corporate governance within that sector.  For instance, real estate as a sector we avoid investing into, but might choose to invest in one or two companies which have good corporate governance and transparency within them.


    PS: Original Article was published at Money Control. Follow the link for the article.