Ritu Arora, CEO & CIO Asia, Allianz Investment Management feels Budget 2021 is going to be a crucial one from a signalling perspective.
In an interview to Moneycontrol’s Sunil Shankar Matkar, the CEO & CIO Asia at Allianz Investment Management opined that the government needs to both encourage as well as unshackle the Indian insurance industry.
edited excerpt:
Q) What are the key risks in 2021?
A) Successive waves of COVID-19 with worsening trends in terms of new cases, hospitalisation and deaths mean that this epidemic will continue to remain a major economic concern for the foreseeable future. Health systems in many countries are operating close to full capacity and a lot is still unknown about the new strain. While market participants have understandably been optimistic about COVID-19 vaccines, the crucial journey from ‘Vaccine to Vaccination’ lies ahead.
Global economic risks stem from already high expectations of a strong fiscal package. As democrats now control Presidency and both chambers of Congress, any delays around the same will cause concern for the markets. Additionally, the US yield curve has steepened with long end moving higher as inflation expectations have moved up anticipating a stimulus. 10-year government security yield has moved up 55bps from August lows. There is a risk that markets may do a renewed taper tantrum in case interest rates run up too fast too soon.
With regards to India, there is still the risk, albeit lower than 3 months ago, that parts of the economy come out permanently scarred. Hence policymakers need to enhance aggregate demand which requires strong fiscal support. With the fiscal situation already stretched, this will be a thin rope to walk on. As a global reflationary trade takes shape, it will be worth watching the core inflation data for India. This could complicate monetary support to some extent as well as cause currency challenges.
Q) How did 2020 pan out according to you? Also, what should the government do in 2021 to bring the economy back on track?
A) To quote Warren Buffet: ‘Rearview is always clearer than the windshield’. 2020 has indeed been a year of unforeseen challenges. India’s lockdown was among the most stringent in the world and there was a direct impact on economic activity. We see an equally sharp recovery now with many indicators like freight, electricity demand, property sales, import collections, petrochem sales etc. almost fully recovering and even workplace mobility which has been a relative laggard normalizing to 80% of pre-COVID levels.
Looking at reported health data, declining domestic virus trends gives India breathing space to put in place a comprehensive public health response. Given India’s strong expertise in Pharma, especially vaccine manufacturing, now is the time rise to the occasion. Apart from pandemic response there is a need for more consensus building on the policy front and continued implementation focus to consolidate reforms already underway such as IBC, RERA, GST, ease of doing business – these we believe would play out extremely well in the long-run.
In addition to these, demand enhancing measures are especially impactful in real estate, since it is the second-largest employer in India. Accelerating delayed projects while rescuing stranded ones would be a good short-term boost. For the long-term, a slew of varied targeted measures such as improving connectivity, digitalization of land records and greater income tax exemptions would go a long way.
Q) What is your view on the global economy for 2021? Also, do you expect more stimulus measures from the western world?
A) Globally, there is palpable optimism that the vaccines will supercharge global growth in H2 2021. This along with a change of guard at US is a breath of fresh air. Biden is widely expected to follow a multilateral approach on key issues including trade. This brings in policy predictability and reduces volatility which is positive for risk assets and EMs including Asia.
A strong stimulus package is reported to be imminent under the new US President: this includes an increased direct transfer of $ 2,000 per eligible beneficiary. Such measures will need to continue until people can safely return to work. Interest rates will also need to remain close to zero until economic growth stabilizes and inflation overshoots. Hence it remains to be seen how the US Federal Reserve achieves yield control, whether it will be explicit or somehow implicit.
As the recovery matures, we see a rotation into cyclical sectors like financials, energy, metals and auto, which will see significant catch-up during 2021. Pace of recovery will vary based on underlying sector dynamics but the turnover and profitability scars from 2020 will take time to heal and may return to pre-COVID levels only by early 2022.
Q) What opportunities and threats do you foresee in the Indian context?
A) India owing to its favourable demographics, long-term growth trajectory, high-quality corporates and strong institutions has many positives going for it. The country is already a world leader in offshore services and knowledge-driven manufacturing like Automobiles and Pharma. India is poised to play a key role in the mass production of the vaccine.
India also has the third-highest number of unicorn start-ups, competing against global giants in an open market. Therefore, the ability, confidence and resolve to compete and ‘win’ definitely exists. The manufacturing sector is also likely to get stronger as structural issues such as labour laws; high industrial power tariffs etc. are resolved.
While the opportunities for India are unlimited there do exist a limited number of threats. These include inward-looking economic policies and isolationism. So long as India remains true to its democratic character and continues with liberalisation policies set out in 1991, it will continue its economic progress, well on its way to a $ 5 trillion economy and beyond.
Q) What are your key expectations from the Budget this time?
Budget 2021 certainly is going to be a crucial one from a signalling perspective. Increasingly, the annual budget is viewed as a statement of intent, with its actual implementation determining the real impact on markets and economy.
Financial services being the largest sector requires special attention. Finance-growth nexus is well recognised across the world: deeper financial markets spur economic growth and balanced financial systems more conducive than bank-dominated ones. To deepen India’s financial markets, the Government needs to both encourage as well as unshackle the Indian insurance industry. Strong and vibrant insurance and pension sectors are bedrocks of economic development. On one hand, they are a source of significant long-term capital for sectors such as infrastructure, and on the other, they provide regular income and protection to citizens.
Globally insurance companies today are leading partners in infrastructure investments and provide the much-needed long term capital for such projects. These are, of course, highly complex and companies have spent decades building technical know-how and teams. India needs to attract long term strategic players to its insurance industry who can help it accelerate this decades-long learning curve. The Government should seriously consider opening up the sector further to FDI and so that availability of capital for critical infrastructure building increases meaningfully.
Q) What is the FDI amount in FY21 so far and what were the sectors that attracted the FDI?
A) FDI inflows for FY21 are likely to be about $ 43 billion which indeed is an all-time high, but these also include certain bulky tech-related stake sales. Given the various factors, we outlined earlier India remains attractive for long term foreign investors. Recent labour reforms and the ongoing move to diversify global supply chains will prove to be a further tailwind. Overall FDI inflows of another $ 40 billion are factored in for the next two financial years. Hence, the target of $ 100 billion is ambitious yet achievable.
Among other sectors, Insurance has also attracted about a quarter of FDI inflows into services since raising of FDI limit to 49 percent in 2015. Raising this cap to 74 percent, simplifying M&A, reducing GST from current onerous levels of 18 percent and increasing income tax benefits are some of the low hanging fruit for the forthcoming budget that will benefit entire Indian insurance sector and attract long term strategic insurance investors.
Q) What are key takeaways from 2020? Also, what is your advice to investors with respect to 2021?
A) 2020 has been a year that none of us will forget and many generations will refer back to for learnings. Indeed, the biggest lesson learnt is that ‘the only constant is change’ and ‘belief in human ingenuity’. As an investor, this calls for implementing and living through an anti-fragile investment value chain that grows stronger with such unforeseen shocks. Our ALM and strategic allocation-based investment strategy have held up well and alternative investments proved their resilience. With respect 2021 our advice would be to run a matched ALM and persevere with long term allocations even during times of volatility. Implementing this as an investment process improves portfolio resilience.
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