The Sensex may manage to post a return of18-20% by March 2013, believes Saravana Kumar, CIO, Tata AIG Life Insurance. In an interview with FE?s Devangi Gandhi, Kumar points out that any correction in the near-term could be used by insurance players to deploy funds.
Excerpts:
Do you expect the current rally to sustain?
It is difficult to ascertain whether the current rally is sustainable because the benchmark indices have already gained more than 12% since start of the year. However, we are not expecting the market to show a sharp correction in the near-term and even in 2012. Most of the money that has come into the market in January has been from India-dedicated funds while global and emerging market funds are still cautious. If they start increasing their allocations, the rally could remain strong.
Last year, almost 70% of the $6 billion invested by domestic institutions in equities, came from insurance players. Moreover, between January and March insurance policies will be renewed and insurers will have the funds to take advantage of any correction in the market.
How do you see 2012 panning out for the equity and bond markets?
The Sensex could give a return of 18-20% in 2012-13. Markets, however, may not see a one way upswing since it has already gained 12% since January and investors may want to book profits and trim their portfolios. We are not over bullish but selectively deploying money into stocks where we find value. As far as fixed income products are concerned, we have invested in longer-term government securities and also longer tenure infrastructure bonds.
Which are the sectors you are bullish on?
We may look to put money in interest rate sensitive stocks after having already made good gains on our investments in the banking space. Capital goods is another sector where we are selectively putting money. We are cautious on real estate and construction sector as we don?t see recovery soon. We also like commercial vehicle players.
What is our outlook on benchmark yield?
We expect the RBI to start reducing the reference rates post April and we may see a 100 bps cuts by end 2012-13. However, the strength of the currency and imported inflation based on global prices of commodities like crude oil, coal and base metals would be crucial. Crude oil prices, specifically would be a key factor as every $10 increase in global crude oil prices strains our current account deficit by $7-8 billion. We see Brent crude trading between $95-100 in the medium-term since any supply constraints, due to US sanctions on Iran, could to an extent be offset by output recovery from Libya. We are expecting the 10-year benchmark yields at around 8-8.5% in next 4 to 5 months. It may soften further depending on RBI measures. Spreads on AAA-rated infra bonds, currently at 70 basis points, may start narrowing further.
How do you see the impact of rupee volatility on IT and pharma firms?
We are positive on export -oriented sectors like IT and pharma since we feel the rupee may weaken to 54-54.20 against the dollar by June-July given the widening current account deficit. We have an equal weight on IT space as we are not expecting a slowdown in orders given a recovery in the US economy and increasing IT budgets of companies. The December quarter numbers from majors like Infosys, TCS or Wipro were not disappointing. We see the pharma sector benefiting from the depreciating rupee as well as rising orders from European and other EM markets. We are expecting large-cap IT and Pharma stocks to give better returns than mid-caps.