Prasun Gajri, CIO, HDFC Standard Life Insurance Company in an interview with ET Now talks about talks about porfolio building in a volatile market and sectors that the company is bullish on.

Is the liquidity very strong, is the investment rationale compelling at the moment?

Liquidity is not a problem for us. As far as insurance companies are concerned, the sales have been good, the money is flowing into the funds. So as far as we are concerned, we never take a very very aggressive cash call. We are clearly more or less invested most of the times. So our cash levels are low.

Now compelling investment opportunities is a bit more difficult to find in the current market. We have been cautious almost for the last two to three months, clearly given the macro situation across the globe and we continue to be cautious on that. Yes, there are opportunities available which we are taking the advantage of but by and large, the portfolio is more defensive than it was probably somewhere in January and we continue to maintain that position but we are invested in any case.

What strategy do you use to keep your downside limited perhaps in volatile markets like this?

We do not have any options really because we are not allowed to access the derivative markets. We cannot access the futures or the options market at all. Therefore the only way we can hedge ourselves either go long on cash which we do not do as a policy. Thus I personally believe that does not really work over a long run.

Other is to build up a more defensive portfolio which is exactly what we have been doing luring the beta in the portfolio, buying what we believe is less likely to fall in a market which is going through a volatile phase. So clearly trying to protect ourselves by cutting exposure to stocks which are much more volatile. So that is the policy which we have been following and that is purely because the regulations do not allow us to access the futures market.

In terms of life insurance companies in general, a phenomenal amount of capital also required. In terms of that, would you say that the company is adequately capitalised or is there a situation where you need more capital?

We are absolutely adequately capitalised. I do not think that is a cause of concern at all. That is very very different. What I am talking about is more on a unit linked funds which are the funds which we manage for our policyholders. So the capital is a completely different ballgame. Capital is by and large invested in the fixed income side and at any point of time, we have to maintained minimum solvency margins. We are above that and that policy we have maintained. I do not think that has anything to do with the way we are managing the equity part of our portfolio.

Sectorally, where do you think things will really end up well and perhaps that is where the eye on the ball should be?

Our call is that we are very bullish on the consumption theme. By and large, that is a holistic theme which will continue to play out and by that, we are very clear that that will work on say FMCG side, we will work on automobile side, we will work on even the healthcare side. These are the sectors where the domestic consumption is going to be the key driver. Now while one can argue, in some stocks the valuations could be more expensive than the others but by and large, these sectors are something which will continue to do well because these are not likely to be impacted by global uncertainty which is really prevailing at the moment.

So wherever we believe the sectors are either likely to get impacted by the global supply and demand situation for example in commodities or in sectors where the requirement of capital is very high and therefore any risk aversion could mean raising capital becomes much more difficult across the world. Those are the sectors which we would be trying to avoid at the moment but wherever we believe is pretty much a domestic story, capital is not a major issue, the demand has been robust and will continue to be robust.

Those are the sectors we would want to be focussed because those sectors will not just be defensive for you but even in an uptick in the market, those sectors will probably prove to be good as well. So from our perspective, we are clearly focussing on those sectors and avoiding something which is aligned more to the global markets.

Where do you find merger arbitrage opportunities and as we go forward, where do you find liquidity putting a dent on the company’s ability to grow? Can you give views on some of the infrastructure companies that totally depend on dilution after dilution and then perhaps merger arbitrage opportunities?

That is where our concerns are. If you believe there is a company which is going to require capital both on the debt and the equity side to grow, those are the companies which we would be avoiding for sometime, not that they are not good growth opportunities if I take a three to five-year call but if the global liquidity situation tightens for a reason or a risk aversion increases and the problem today is you do not really know where the problem is coming from.

You were focussing on certain countries in Europe and on Friday you get a problem from another country, the US data is very much mixed. So you get good data for a couple of days and certainly have a day when data does not look so good. So clearly, the situation is not alarming but it is clearly telling you that all is not well and therefore things can move in a direction which you would not want them to move and therefore, some of these infrastructure names which clearly require lot more capital raising to keep growth, those are somewhere we are not really enthused about those at the moment. Looking for merger opportunities, it is a tough call to make from a portfolio investor’s perspective.

If I am managing a portfolio, I do not think I will be really looking for those opportunities actively. Having said that, pharma sector is proving to be one where one is seeing such opportunities coming up either through some tie ups or even the buy outs. So clearly some of the smaller pharma names have been looking exciting but I do not think I want to focus my portfolio by trying to guess names which are likely to take the benefit from any such merger opportunities. We are much rather focussed on fundamentals of it rather than look for such opportunities.

If we do go below that 5000 level, what do you believe is the crucial resistance level that we do need to watch out for?

We do not really look at these levels but the way we are looking at the portfolio today is very simple. Probability of markets moving up and making some money is low at the moment and what can the markets fallback, it is very difficult to say, is it going to be 3%, 10%, very difficult to take a call but by and large, the probability of the markets falling is much higher than the markets rising at the moment. So if that is the case, one would want to be cautious. One may not really want to take much more beta in the portfolio and that is exactly what we are doing. Whether the support comes at 4950 or whether it comes at 4800, tough to say, these supports are there to be broken at some point of time. So I do not really have a number to put. If you look at the entire year since the beginning of January, markets have been negative. So nobody has really burnt his hands by trying to be cautious and not taking any aggressive calls over this period.