• HDFC
• 20 Jun 2018
• Equity Product

HDFC, Tester

Do the expectations of the outcome of the 2019 elections send a shiver down your spine? If the answers to all the questions are yes, welcome to the club of the worried domestic investor. Before I tell you where to invest confidently in this volatile market, let me assure you of a few things.

 

The markets by nature are volatile. In fact, the volatility is a sign that the markets are alive and licking. Don’t worry about it. Learn to live with it. Markets are always uncertain and volatile. So no matter when you decide to invest, or how long you wait, you will always end up investing in an uncertain market.
Let me give you a recent example.

 

At the end of April, investors were in a ‘wait and watch’ mode in the month of May. Reasons were obvious. May 12th was the date when the U.S. was supposed to take a call on the Iran deal. May 15th was the counting of the Karnataka Assembly. So the common investor wanted to get the results out of the way first then invest.

 

Trump surprised the global markets by canceling the 2015 Iran deal on May 8th itself. Karnataka elections were a roller coaster, so much that even after a few days of the results being known, there was still uncertainty.

 

Did those investors ultimately invest? No!

 

New worries are surrounding them. Last week they were worried about the rising yields of Italian bonds. And now that Italy finally had a government in office on the morning of 1st of June, they were waiting for the Spanish Vote of Confidence. More uncertainty awaits them now as a new Government will have to be sworn in as the Spanish PM lost the confidence vote.

 

The point is no matter how long you wait, you will still have uncertainties.

 

What to do?

 

An investor in sectors should have good visibility, growth prospects and have a favorable ecosystem to flourish. FMCG, Consumer Durables, Autos, Banks have done well for many years. While these will continue to do well, I will bring to your notice a nascent sector that will flourish despite all the noise in the marketplace.

 

It’s Life Insurance

 

It may sound perplexing that the life insurance business has been around in India since 1818 when Oriental Life Insurance Company was established in Calcutta. However, this category remain comparatively nascent.

 

Well, while this business was in vogue for many years, you could not buy any share directly in a life insurance company. This was until the first IPO of a pure life insurance company, ICICI Prudential came about in September 2016. It was followed by the SBI Life IPO came in September 2017 and by HDFC Life in November 2017 (Not under coverage as it is a group company).

 

The largest of them all is LIC of India which is not currently listed.

 

Abysmally Low Penetration

 

Simply because penetration of Life Insurance in India is very low it makes an exciting high growth sector. Consider this. The ratio of premium to GDP in India is only 2.7% as against a world median of 3.5%, or Thailand’s 4% or South Africa’s 11%.

 

That leaves a lot of gaps to catch up with.

 

Another way to look at the opportunity is the number of life policies in comparison to the population. That ratio is abysmally low at 2% as compared to 80% in developed countries. And even those who have a policy are grossly underinsured.

 

This comes as a surprise that even people who are aware and have taken an insurance policy are grossly underinsured. Conduct a dip test amongst the people around you and you will soon realize, how grossly underinsured India is. So in India, we not only have the issue of lower penetration but also under-insurance. Both these factors mean faster growth opportunities.

 

FIIs and Pension funds like them

 

Long-term institutional investors like pension funds and other FIIs love life insurance sector for the visibility it offers. They have benefitted from their investments in this sector globally. This sector is the best player on India’s demographics. And knowing the growth possibilities in the sector, they are likely to be held these stocks for really long term.

 

FIIs have long held the parents of these companies like ICICI Bank and SBI. But now that these insurance subsidiaries have been independently listed, they are taking a direct exposure to the desired extent. They are now playing the India story directly through these companies.

 

The tax advantage

 

This year’s budget on 1st February, gave the insurance sector a gift. The investments through ULIPs were made exempt from the Long Term Capital Gains (LTCG) tax.cWhile direct equity and mutual fund units will bear the LTCG impact, the ULIPs will be exempted. This gives the ULIPs a tax differential which will make them a preferred vehicle of equity investments.

 

As more money flows into ULIPs the AUMs of these insurance companies will rise, enabling them to improve their returns to their shareholders.