Do Not Get Swayed By Sentiments

Updated: Jul 25 2004, 06:29am hrs
Aviva Life Insurance is a joint venture between Dabur and Aviva Group, the largest insurance company in the UK. Within two years of operations, the life insurance joint venture, with its range of unit linked products, has garnered premium collections in excess of Rs 200 crore.

The company has built up a sound investment portfolio to maximise its income to facilitate a better return for its growing customers. Bobby Surendranath, fund manager, Aviva Life Insurance, shares his thoughts with Sitanshu Swain of The Financial Express about the current investment scenario. Excerpts:

How do you see the current market situation
Equity markets are still significantly undervalued at a P/E of 12 based on forward earnings. As the Indian economy progresses at a GDP growth trajectory of more than 7 per cent, we can expect significant investor interest at current levels of stock prices.

The immediate market direction may, however, be more affected by the impact of the monsoons on the agricultural crop and some large IPOs lined up for the coming six months.

With monsoon scare looming large, what are the expectations from the market
Market sentiment may get adversely affected, if there is a poor agricultural crop this year. However, stock valuations are still reasonable for longer term investors. Further, India is progressively becoming a large global player in sectors like auto parts, software, generic pharmaceuticals and textiles.

Profit expectations in these sectors would not be adversely affected by the monsoons and would yield positive absolute returns for investors at current levels of stock prices.

How do you see the IPO market in future Will government companies access the market
The IPO market becomes active when the stock valuations go up coupled with increase in retail appetite for stocks.

Though, it is difficult to predict the exact time, when the market sentiment would improve, we expect that over the next two to three years, the market will deliver attractive returns. The IPO markets may once again become active.

Do you think transaction tax is still an overbearing concern for the market despite recent changes announced by FM
The transaction tax will gradually get assimilated by investors into their overall cost of trading securities. Long term investors will find the transaction cost impact negligible as compared to the relief in capital gains taxes that have been proposed.

How should an investor cope with rapid changes in the investment environment and volatility
Investors should keep a long-term horizon (a minimum of three years) and avoid active trading. They must also buy shares of fundamentally sound companies that have long term growth potential and are available at reasonable valuations.

Market volatility gives a long-term investor an opportunity to buy stocks cheap, when the overall market sentiment turns negative because of short-term temporary problems.

Moreover, investors have realised the fact that putting money gradually into the market is the key to prudent investing rather than being swayed by market sentiments.

Which sectors will perform better now and why
Textiles, pharmaceuticals and software sectors are likely to perform better in the current scenario. Textile quotas for Indian companies are set to go from January 2005, thereby paving the way for opening up global markets.

Moreover, several Indian pharma companies have been able to develop and deliver world-class generics to MNC pharma companies globally at very low prices.

The Indian software sectors are also expected to show positive margins in future, driving profitability for companies in the sector.

Furthermore, we see trends like retailing and mobile phone usage in India driving growth for at least the next 3 years for companies in those sectors.

With interest rates moving up, do you perceive investment in debt as a safe bet
Historical data shows that debt has not been an attractive asset class to stay invested in the long-term. We still believe that equities would be able to deliver high returns over the long-term. However, there may be opportunities to make better returns in debt securities for temporary period, when interest rates are falling.

Presently, rising interest rates would make long term bonds less attractive due to the risk of capital losses.

The short term risk free securities are yielding only about 4.5-5 per cent, while the earnings yield (reciprocal of P/E) for equities is about 8 per cent.

Are insurance companies favouring equity investment
With the launch of unit linked products by several private sector insurers, the exposure to stocks has certainly increased. Unit linked funds have asset allocation options that may have a significant exposure to equities.