In 2023, the market performance was exceptionally phenomenal with Nifty 50 generating 20% returns, Nifty midcap index making 46% and small cap making 48% returns, which was the most impressive performance since 2017.
However, with most of the positives already factored in, the same level of performance or those better than in the previous year looks difficult, said Ajit Banerjee, Chief Investment Officer, Shriram Life Insurance during an exclusive chat with ET BFSI.
While the positives in terms of political continuity, political stability, economic growth momentum have been factored in, the direction of the markets going forward will depend heavily on corporate earnings, which may face headwinds in terms of rising costs leading to limitations on margin expansion. , he pointed out.
Backing up his statement further, Banerjee added that the probability of a sub-normal monsoon could increase food inflation levels, dampen the growth of rural sector, geopolitical risks flaring up further etc.
In addition, if global growth fails, our export-oriented businesses will suffer. These may turn out to act as obstacles to demonstrate the same amount of market return in FY25, although the overall outlook remains positive.
India’s long-term growth story is positive and is currently in gold bullion. The focus on making the country AtmaNirbhar Bharat and a global manufacturing center remains with the Government, therefore we continue to remain bullish on sectors such as infrastructure, cement, steel, real estate, engineering, capital goods sector, and financials over the medium to long term. term perspectiveBanerjee said.
In an attempt to gain a deep understanding of how insurance companies invest and ensure that the investment portfolios generate surplus, we spoke to him about the investment patterns, strategies, trends witnessed in FY24 and the outlook for FY25. Here are the edited excerpts:
What is the pattern in which insurance companies make investments?
The pattern of investments in insurance companies is governed in alignment with the liability profiles of the respective funds that are to be invested on the contours of IRDAI investment regulation, respective board-approved investment policies and risk appetite of respective insurers.
Therefore, it is mostly responsible asset management that is followed as opposed to asset management that is followed by banks and NBFCs. Therefore, the main effort of the investment function in any insurance company is to keep liability and assets optimally matched, since a perfect match is not practically possible.
This will ensure that the mismatch risk arising from the movement of interest rates is contained within the risk appetite of the insurance company as agreed periodically.
What are fund managers more optimistic about? How do they ensure that the investment income remains in surplus?
The main objective of the fund manager remains on the deployment of assets to ensure that investment portfolios generate returns in excess of the guaranteed returns that the company has made to policies. It should also protect the required margins for running the business and generate profit for shareholders for guaranteed and other traditional funds, while at the same time, beating the benchmark returns for ULIP funds in a risk efficient manner.
To ensure the same at portfolio level, decisions on asset allocation, sectors to focus on, stocks and interest rates on fixed income securities are taken. Since life insurance companies are long-term investors, therefore the investment decisions are taken keeping this in mind, unlike a business portfolio.
The investment income is also optimized through asset calls, interest rate calls (remaining within the scope of the ALM requirement) and the company’s risk management framework.
What are some of the trends you witnessed in FY24?
As we are at the peak of the interest rate cycle and the yield curve has flattened, many fund hires and investors are taking long positions on the fixed income side with the expectation of getting decent returns when the rate cutting cycle begins. Many active foreign portfolio investors increased their exposure to fixed income securities ahead of the JPM indexation to gain an early mover’s advantage.
On the equity side, we see the bullish flow that prevailed among mid and small caps now slowing from its peak. Many investors are moving to large caps to de-risk their position because valuations are still attractive.
What is the outlook for FY25?
In the current market landscape, large cap stocks show greater resilience and offer a more favorable risk-return compared to mid and small caps. Effective sector and stock rotation strategies will be pivotal going forward. However, the fundamental growth story for mid-cap and small-cap companies remains intact as growth remains broad-based.
The markets will also watch the decisions made by the US Fed, movements in bond yields, trends in oil prices and election results in India. Deviation from what is already price, the progress of the monsoon or developments around geopolitical issues will decide the course of the market further.