Equity emerged as one of the best-performing asset classes in 2014, driven primarily by a historical electoral result and the perception of a reforms-oriented government at the Centre. The Sensex, till December 26, gave around 30% return and some of the BSE indices, such as banks and auto, reported 63% and 50% YTD returns, respectively.
The Indian markets outperformed Asian and global peers as cyclical, rate-sensitive and investment-oriented stocks found favour. Equity mutual funds, too, saw highest inflows in the last 10 years. Even in life insurance, market-linked plans saw a smart revival.
Insurance: A mixed bag
For the life insurance industry, 2014 was a mixed year. First-year premium — which is its bread and butter — declined 4.3% during January to September 2014 as Insurance Regulatory and Development Authority (Irda) enforced new product regulations aimed at increasing the benefits for policyholders from January this year. The promulgation of the Insurance Laws (Amendment) Bill, 2014, by the President, which among other things, raises the FDI cap to 49% from 26% is expected to provide some fillip to the industry.
This year saw a smart revival of Ulips, which went through a complete makeover in 2010. From January to September this year, linked products accounted for over half of the new business premium of private insurers. During the same period last year, Ulips accounted for less than 20% of the new business premium, data from the top seven private insurers that disclose segmental revenue show. State-owned LIC has not launched any linked products after the new product regulations kicked in.
Munish Sharda, MD & CEO of Future Generali Life Insurance, says Ulip structures have been simplified and with the discontinuance fund option, customers are secured of minimum returns on their premium investment. “As a market-linked product embedded with tax benefits, there is a renewed interest in Ulips, which if managed well in the long term with a goal in mind, is an ideal opportunity and will add great value to the investment portfolio. We are seeing inflows in Ulips (both equity and debt), and expect this positive momentum to continue in 2015,” he says.
The health insurance segment saw positive growth because of rising awareness. The new health regulations by the insurance regulator also ensured transparency in product structure and pricing. “The guidelines have given a direction to the health insurance sector. Although it is too premature to judge the impact of the New Health Regulations, this could be the starting point for many more reforms to come. We can expect the industry to reach a phase of growth with stability,” says V Jagannathan, CMD, Star Health and Allied Insurance.
Debt funds: All eyes on RBI
Retail inflation decelerated much faster and RBI acknowledged a possible need for a rate cut early next year. Liquidity by and large remained comfortable, keeping shorter end of the yield curve supportive. As a result, bond and gilt funds posted double-digit returns for investors.
Lakshmi Iyer, CIO (Debt) & head of products, Kotak Mutual Fund, says 2014 has been quite fruitful for fixed-income markets as yields tapered on expectations of a moderation in inflation. “In 2015, commodity-led disinflation is expected to continue and interest rates could ease by 50-75 bps and duration funds do well in the fixed-income pack.”
Murthy Nagarajan, head of fixed income at Quantum Mutual Fund, says RBI would be cautious and look through the base effect of CPI inflation. “Given the high expectations of the equity markets from the Budget, we expect RBI to keep rates on hold, till the Budget and cut repo rates by 75 to 100 bps in 2015 to support growth. The sequencing of rates cut could be in the later part of the calendar year, as RBI gets more clarity on impact of Budget, monsoon and expect path of interest rates hikes in the US,” he says.
Gold: Loses glitter
The yellow metal was the biggest loser, as commodities like oil and metal collapsed globally. Gold ETFs in MFs saw outflows as prices of the metal in the domestic market collapsed 10% between January and December.
Commodity experts say gold prices could be under pressure in the short term as the market anticipates the US Fed to raise interest rates. Gold tends to perform well during periods of declining confidence in the financial system. With the markets on the mend globally, the metal may not glitter much next year. However, lower gold prices will provide investors with an opportunity to build up their allocations to the metal for long-term financial goals.