Outlook for August 2014
We continue to remain neutral on domestic bond markets as we believe that the government has set an ambitious target of containing the Fiscal Deficit at 4.1% of GDP in FY15. The recent reduction in Statutory Liquidity Ratio (SLR) and Hold To Maturity (HTM) in the Third Bi-Monthly Monetary Policy Statement 2014-2015 is also expected to keep the yields under check in the short term. We also believe that RBI might start reducing the interest rates in CY15 post their review on monsoon and subsequent impact on food inflation. However, the current yields remain attractive for long term investors providing an opportunity for good capital gains once RBI starts reducing the interest rates.
The domestic equity market has remained buoyant in the recent past on the back of the expectations from the new government and the Union Budget. However, going forward the equity market performance would be driven by the growth in domestic GDP and corporate profitability. We also expect the market buoyancy to be contained by primary issuance and mixed macro-economic data points in the short term. Sensex valuations at 16.7x CY15 earnings, remain higher than historical average. However, over the long term we expect the economic cycle to revive and corporate earnings to compound at double digits thus resulting in markets delivering returns in the range of double digits.
INVESTMENT RISK CONTROL FRAMEWORK
The Company recognises that risk is an integral element of investment management and managed acceptance of risk is essential for the generation of value. The Company’s acceptance of risk is dependent on the return on risk-adjusted capital and consistency with its strategic objectives. The Company will endeavor to reduce risks to the extent it is optimal to do so. In general therefore, the Company’s control procedures and systems are designed to manage risk, rather than eliminate it.
To manage the risk effectively, the Company has a three tiered investment structure with varying levels of decision making, which comprises the Board Investment Committee, Executive Investment Committee and the Investment team.
The Board Investment Committee recommends and reviews investment policy and changes thereto, reviews investments and oversees the risk management framework for the investments. The Executive Investment Committee is responsible for building investment strategy, monitoring investment decisions and returns, providing support on regulatory and tax issues and it also approves delegation of authority to the Dealers. The Investment team is responsible for market tracking, investment decisions, investment compliance, monitoring and reporting of risk.
The Company has strong governance framework encompassing segregation of duties and adequate firewalling between Investment and other roles. The Company has code of conduct to prevent insider trading. System used for investment management is seamlessly integrated within and with its peripheral systems with adequate system as well as manual controls. The activities and systems of the Investment team are subject to concurrent audit.
The Company uses advanced risk identification, measurement and management tools to ensure that risk exposure is within the Board approved risk policy.