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How would the resolution of recent regulatory issues affect cash levels among Indian insurance companies? How could participation change?
In my opinion, the end of uncertainty over regulation would help more fund inflows into insurance sector, because it would bring more clarity to potential unit-linked insurance plans (Ulips) buyers andrationalisation of allocation charges would bring more money into the funds due to higher investment portion.
We expect equity flows from the sector to rise post resolution and approximately $16 billion (Rs 73,680 crore) would flow into equities in FY 2011. This will help investment managers to keep lower cash levels, as the end of uncertainty will lead to higher sales and flows. This is a big positive for equity markets. Domestic insurance companies own almost 11% of Indian equities and insurance companies have played a crucial role in last few years, particularly when global financial crisis impacted and lead to large outflows by foreign institutional investors (FIIs).
Most of the $14 billion of FII selling was absorbed by insurance companies in 2008-2009. Indian insurers play a very critical role in the development of financial markets, as they fund 23% of government borrowing programmes and also funds, directly or indirectly, 15% of domestic infrastructure financing requirement.
Which sectors are you bullish on?
Banking is likely to do well, mainly due to strong credit cycle, reduced asset quality risk and environment of neutral interest rates. We also like capital goods and engineering sector on the back of strong order backlog and strong growth in economic activity. It will be primarily driven by power and infrastructure sectors. Most large sectors today are operating around 90% capacity utilisation levels, with robust economic growth. You can't have a better time than this to focus on capex spending. The public capex cycle has picked up quite well and we expect private capex cycle too to accelerate going forward.
How do you see lending activity picking up among banks?
RBI data (dated June 4, 2010) shows a 20% rise in credit on the back of strong loan growth mainly contributed by telecom companies for 3G payment. We expect credit growth to gain momentum in the second half of the year, supported by industrial recovery, higher working capital, need backed by strong growth. A large part of sanctioned loans will see draw-downs bythe infrastructure sector and with capacity utilisation levels at alarming level, well supported by improved business index, will lead to higher capex and investment demand for credit.
What are the indicators that you are watching for cues on the situation developing globally?
I focus on data points such as interest rates, currency trends, commodity price behavior, particularly gold and crude prices, credit default swap (CDS) spreads of most European and Asian countries, employment, sales and growth indicators of large global countries are to look out for. But I am a firm believer that structurally strong markets like India would outperform the weaker markets with huge margin that's what really matters for long-term investors like us.
How could a change in the Chinese currency rates affect inflows and trade balances to emerging markets such as India?
We believe that the revaluation of yuan would help rebalancing the global imbalances-most importantly the widening US trade deficit with China. A rising yuan would give China more purchasing power to import more goods, which would be positive for the world trade. The revaluation of yuan will also help increase the domestic consumption vis-a-vis an increase in the Chinese household incomes. Yuan revaluation will be positive for world trade, but at the same time China will export inflation to the world and that will have a positive co-relation to commodity prices. India will have to appreciate its currency to fight domestic imported inflation. Overall, it would be a big positive for fund flows as an appreciating yuan will lead to appreciation across Asian currencies in general and portfolio inflows to Asia would surge. India is likely to be the biggest beneficiary as global investors still are underweight India when you peg it to the country's market capitalisation and growth estimates.
Car sales in India rose 30.4% to 1.48 lakh units in May 2010 over May 2009, how do you see the demand situation playing out for the passenger vehicle sector going forward?
Vehicle penetration in passenger vehicles has declined from 150 per 1000 in 2005 to 108 per 1000 in 2010 and in the same period addressable population has gone up from 60 million to 150 million. This indicates that passenger vehicle demand lagged income growth. More importantly, the size of this income group is expected to reach 250 million by 2015, presenting a huge growth potential.
With interest rates likely to remain stable we expect passenger vehicles demand to grow by 18-20% compounded annual growth rate over the next 5 years. Another important factor is the abysmally low penetration level in the rural segment and limited geographical spread and in my view next big driver of growth for Indian car market will be rural penetration on the back of higher disposable income and improved infrastructure conditions.
Source : DNA Money
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