Want compounding stocks with minimal risk? Play this theme

Though insurance companies are part of the banking and financial industry, they do not suffer from any asset quality challenges or credit quality risk. This is a very good sector to invest in from a longer term perspective, says Akash Singhania, Fund Manager, Motilal Oswal AMC.

You have a very good mix of insurance companies in your portfolio. Do you see insurance as a compounding play with 10-12-15% average over the next 10 years?
Insurance is a theme for medium to long term. Whether it is five years or 20 years, it is a structural story and a sunrise theme. This is because the penetration in India is still very low and even the per capita spend on insurance is extremely low. The other thing is with financialisation of savings and money moving from real estate or physical assets, it is going into financial assets and that also helps whether it is ULIP products of insurance companies or asset management companies.

The third trend we are seeing is of value migration where many of the private sector insurance companies in life or the general insurance space are continuing to gain market share and they are continuing to deliver industry leading growth figures.

There has been a combination of various factors including under-penetration, favourable demographics, a long runway of growth potential, increase in market share because of value migration and therefore from a medium- to long-term perspective, these could be good compounding stories with minimal risk. Though insurance companies are part of the banking and financial industry, they do not suffer from any asset quality challenges or credit quality risk and therefore it is a very good sector to invest from a longer term perspective.

One of your biggest holdings used to be an energy stock but with every passing quarter is turning into a large technology play.What are your thoughts there?
I guess you are speaking about Reliance Industries. Though I cannot delve deep into stock specific discussion, the point is when you diversify your revenue streams and get that extra growth in the new lines of businesses, if you are among the market leaders, you have a competitive advantage. Therefore the longevity of growth also increases. So, competitive advantage period and growth advantage period are the two things that increase and that is likely to generate returns for shareholders.

What is your view on the commentaries coming from banks and financial managements?
So in general the business commentary from banking management has been positive and it includes HDFC Bank or Kotak Bank. In terms of the asset quality, which has been a major challenge and concern for the markets, it appears from the commentary that the worst is likely over and definitely they are looking at a better credit asset quality in the next few quarters. We had a very patchy last six months because of Covid concerns and there was a jitteriness about how asset quality will pan out. But the commentaries say that a lot of provisions have been made for these bad loans and assets and the future looks much brighter. This is more so for banks on the secured lending side on the housing side or the corporate side where they have a lot of security.

On the consumer side or the unsecured lending side which is basically personal loans and credit cards where the security is low, one needs to wait for a quarter or two and then decide and take a call on the asset quality.

How is the earning trajectory of Motilal Oswal multicap 35 fund or MOF35 looking?
Let me start with the trajectory for the last two years and then I will come to the outlook for the next two years. In the last two years, we have had earnings growth of around 15% in the multicap 35 portfolio and this compares with the broader market earnings growth of 5% during this period. In the next two years, I expect an earnings growth of around 20% for the portfolio and it would be fair to assume 10-12% earnings growth for the broader market in the next two years.

What are the risks you are bearing in mind while running your portfolio?
The possibility of a second wave of Covid in European countries or even in the US is a big risk because this can impart near-term volatility in the markets in the next two to three months. However, if there is any volatility or correction because of the increase in Covid cases, the recovery could be equally sharper in a V-shape post the initial volatility. This is what we have seen in the last six months post Feb and March.

Corporate earnings growth has been better than expected in the US as well as the Indian companies in the September quarter. The recovery in earnings growth acts as a good trigger for the markets and any volatility or correction because of Covid risk should be an opportunity for a long term investor to invest in the markets.