Bonds a better bet than equities in short term: Aneesh Srivastava, IDBI Federal Life Insurance

Bonds would give better returns than equities in the next 6 months, said Aneesh Srivastava, chief investment officer of IDBI Federal Life Insurance. In an interview with Shilpy Sinha, Srivastava said that the best of global liquidity and interest rate conditions are behind us.Edited excerpts:

Where do you expect equity markets to be by the end of the financial year?

Our fair value target for the Sensex for March 2017 is 28,300 from the current 28,082. But if investors are ready to hold on to their investments till March 2018, we expect earnings recovery to drive the Sensex and the annualised returns could be 12-15%.

We expect India's nominal GDP (gross domestic product) growth to improve from 8.6% to 11.0% by March 2017, and to 11.9% by March 2018. This would drive corporate earnings growth to 20%-plus in the next two years.

Investors have to understand that short-term investments are always fraught with risks, and one should ideally have 5-7 years holding period for good returns.

Do you expect the bond rally to continue as RBI has softened its stance on inflation?

We expect India's average inflation for the current financial year to be at 4.8% despite a sharp reduction in inflation in the next few months. But this is expected to increase to 5.1% in 2017-18. We do not expect any sustainable reduction in India's inflation and achieving 4% target seems difficult unless the government takes supply side measures which may ease inflation only over the medium to long term.

RBI has also mentioned in its recent monetary policy that there are upside risks to its March 2017 inflation target of 5%. There's a possibility that crude prices may stabilise between $50 and $60, leading to an upside risk to the inflation number.There are risks associated with increase in consumption expenditure led by an increase in pay commission recommendations, implementation of GST (goods and services tax), and rise in government expenditure.It would be difficult for the government to meet its fiscal deficit target of 3.5% as proceeds from the telecom auction and PSU divestments may not meet budget targets. This may also lead to higher borrowings by the government unless it decides to cut down capital expenditure drastically in the past few months.

Do you expect RBI to cut interest rates further?

I do not see any scope for RBI to cut rates from the current 6.25%, given the growth and inflation dynamics, unless the central bank decides to reduce real rate from 1.25%. But any reduction in real rate may have medium-term impact on household financial savings.

Our expectation is that the 10-year government security will remain range bound between 6.9% and 7.1% for the next 12 to 18 months with an overshoot of 15 bps on either side.We feel the current rally in bond markets has run its course.

Do you expect bonds to outperform equities in the short term? How will it affect portfolios of insurance companies since large part of your investment is in government securities?

In the next 6 months, bonds would give better returns than equities, but one should reduce durations of portfolios to avoid risks. So, buying equities on corrections would be a good bet.

Currently, insurance companies are having good yields in their investment book. However, as yields would sustain at current levels, new business premiums would be deployed at lower yields and hence, insurance companies have to take higher risks to earn higher returns like investing in bonds rated AA and investing in alternate investment funds. This would require careful evaluation of risks. Companies may also have to re-price their products and improve operational inefficiency to sustain profitability and give good returns to investors.

What would be the next big triggers for equity, bond markets?

The best of global liquidity and interest rate conditions are behind us. Most of the central banks are realising that lower yields are not incrementally helping to improve economic conditions, and may even be counterproductive. Year-on-year decline in crude prices had driven global inflation down. I expected the Fed to raise rates by 25 bps by December this year, and do not see Bank of England cutting policy rates in a hurry. Bank of Japan has pegged 10-year yields at near zero. I expect global G-sec yields to increase from their current levels. This may create some headwinds for emerging markets despite recent improvement in growth differential over developed markets. Investors should be ready for higher volatility in equity, fixed income and currency markets.A pick-up in corporate earnings in the second half of the current financial year and the government's ef forts to boost economic growth through public expenditure may drive stock markets. In the near term, sub-5% inflation print would drive up the bond market.

On which sectors are you overweight, underweight?

The domestic consumption sector is the best play among sectors that are linked to global growth. I would like to be overweight on FMCG (fastmoving consumer goods), auto and reasonably comfortable with private sector banks and NBFCs (nonbanking financial companies). Domestic industrial sector may also underperform in the near term. We are anticipating headwinds in the IT sector. Public sector banks would take time to improve their loan growth and profitability.

Irda (Insurance Regulatory and Development Authority) issued new investment rules restricting investments only in companies paying a minimum 10% dividend. How does it affect your investments?


Current regulation is more stringent than the previous ones, but I do not think Ulips (unit-linked insurance plans) would become unattractive due to such changes. Regulation still allows insurance companies to invest up to 25% of their portfolio in stocks that are classified as unapproved investment. Enough flexibility is given to insurance companies to take exposure in such stocks.