Better macro prospects in the developed markets is seeing FIIs direct their flows away from Indian markets, says Vikram Kotak, chief investment officer at Birla Sun Life Insurance. In an interview with Samie Modak, he says markets are vulnerable as FIIs will take money off the table on every rise and insurance companies cannot combat FII outflows as the flows into the insurance sector are getting more skewed towards traditional (non-equity) products.
What is your outlook for the equity market in 2011?
Indian equities have been a clear outperformer over the last two years. This year is going to be very challenging due to domestic macroeconomic headwinds. In some developed markets, the situation is in stark contrast. In the US, inflation is not high, interest rates are low and growth outlook is improving. These coupled with attractive valuations may see FIIs directing their flows to developed market equities as seen in January.
What?s your strategy?
In the last couple of months, we increased exposure to defensive sectors. Also, we had increased cash levels to about 15% and booked some profits in expectation of market correction going forward. Since India?s long-term story is very much intact and we have a long-term investment horizon, we are using this opportunity to reassess the stocks and are gradually redeploying funds in stocks which are looking promising after the recent correction.
After the recent fall, markets are trading at their long-term average. Do you think this will be a good support for the markets?
Given the macro concerns, valuations may not be able to drive the markets alone, but will surely cap the downside. Ultimately, it will depend on the investor sentiment. In 2008, when the Sensex fell to 8,000 levels, the valuations were at 9x one-year forward earnings. However, due to looming global worries, markets did not rally immediately. Luckily, the global conditions have improved. But due to near-term uncertainty, we may see FIIs booking profit at every market rise.
Do you think flows from the insurance sector can combat FII outflows?
In the last couple of years, our dependence on FII flows has risen. With the new Irda regulations, flows into the insurance sector have slowed down a bit and are more skewed towards traditional products, which have a lower equity allocation. In FY11, the equity flows by insurance sector will be about $10 billion versus $13 billion in FY10, a part of which flows to primary market offerings. In FY12 the flows can be to the tune of $12-15 billion. However, due to a huge pipeline of primary offerings the flows may be little lower.
What are your expectations from the Budget?
At this juncture, the economy does not require new big-bang reforms. Having laid down structural framework in the earlier budgets, the focus will now be on their timely execution in terms of implementation of DTC and transition to GST regime.