Investment chiefs at some of India’s top life insurance companies are increasing cash levels and stress-testing the balance sheets of companies they invest in as they steer their portfolios through pandemic-led volatility in equities.
“We saw wild swings in stock prices in the month of March and think it came out of foreign funds’ reducing exposure to emerging markets," said Gopikrishna Shenoy, chief investment officer at SBI Life Insurance Company Ltd., which manages 1.6 trillion rupees ($21 billion) of debt and equity assets. “We are preserving more cash now to handle such situations."
The insurance unit of India’s largest bank has increased its cash holdings since the start of the year to 5% currently. Shenoy said the equity market is currently looking expensive and SBI Life is being selective, buying shares of strong businesses when their prices dip.
Foreign investors have started to return to Indian stocks after pulling out a record $8.4 billion in March as Covid-19 forced the world’s most extensive lockdown. The S&P BSE Sensex has rebounded 35% from its March low but is still down 15% for the year, one of the worst performers in Asia. While the country has started gradually reopening its economy, new virus hotspots have begun to spring up in rural communities.
HDFC Life Insurance Co. Ltd. is reviewing its portfolio, analyzing companies’ financial positions to determine their ability to weather difficulty and if they may need to raise further capital.
“What we have done is to have a hard look at each of the companies we have invested in, re-test the investment hypothesis and stress test their balance sheets for the current environment," said Prasun Gajri, chief investment officer at HDFC Life, which manages 1.3 trillion rupees of assets.
Gajri expects stocks to remain volatile for the short term. Ample liquidity, recent relative underperformance and expectations for recovery may help the market move higher, he said, while risks include a possible resurgence in infections, earnings disappointments and asset quality pressure on lenders.
A measure of volatility in stocks has come off the financial-crisis-era high it touched in March, but remains way above its five-year mean. Of the 39 companies on the NSE Nifty 50 Index that have posted their January-March earnings so far, 25 have missed estimates.
As India’s economy heads for possibly its worst-ever recession, SBI Life’s Shenoy says investors are preparing for the fact that corporate earnings are unlikely to recover this fiscal year. “Portfolios are more defensive now," he said.
SBI Life has higher equity weightings in the health care and consumer discretionary sectors. HDFC Life is overweight information technology, pharmaceuticals, cement, telecommunications, insurance, private banks and capital goods.
Bonds still account for some 70%-80% of the insurers’ portfolios, and low interest rates are limiting returns on sovereign debt. With the Reserve Bank of India expected to maintain its accommodative stance and keep yields low, both SBI Life and HDFC Life are biased toward bonds with longer durations.
SBI Life says 93% of its debt portfolio is now in AAA-rated papers and sovereign bonds. HDFC Life Insurance is now analyzing companies to assess their ability to continue to service their debt.
“We are also looking more closely at the pricing of the securities and look for opportunities where the returns are sufficiently attractive for the risks that we take in the investments," Gajri said.