Interview with Nikhil Srinivasan
“Share markets still risky. Government bonds are a better investment choice”
Below the interview released by Nikhil Srinivasan, Group Chief Investment Officer, with Francesco Manacorda, Vice-Director of the newspaper La Stampa on February 11th, 2016.
The man with the fattest portfolio in Italy is 47 years old, was born in New Delhi, studied at Harvard, and it’s easier to meet him at some airport rather than his office in Milan. Nikhil Srinivasan is in charge of the global investments for the Generali group, about 500 billion euros – a quarter of Italian GDP and is “not very optimistic” for 2016.
Up to yesterday, stock markets were falling and interest rates are extremely low. What is your view on the situation and how would you advise savers?
“Firstly, I can tell you what we have been doing in our company since August 2015 to drastically reduce risk on the 380 billion euros that have to guarantee the people who have taken out life insurance policies with us. Basically, we have reduced exposure in three areas: the stock market, which has dropped from 4% to 2.8% of our investments, emerging economies, where we now only have 2.4% of our investments, and Italian bank bonds, which now account for 1.2% of the total”.
What was the philosophy behind these changes?
“That the near future is fraught with risk. And since we’re facing risk, the best thing to do to protect our shareholders and people with insurance policies is to reduce exposure to certain asset categories. Our main goal, which should also be the main goal of any saver nowadays, is to preserve capital, which also means holding on to liquid assets in many cases”.
Two weeks ago at Davos, you said that you would not be surprised if share markets fell another 20%. Unfortunately, you weren’t far off….
“All securities that were boosted in the past by expansionary monetary policies of central banks and real estate shares were over-valued. Present share prices are more consistent with what we expect for the future. But anyone who thinks they can turn a quick buck by taking advantage of recent stock market drops should tread cautiously. I think that we still have two or three volatile years ahead of us that won’t necessarily be positive for shares. It would be better to hold tight”.
You are at the head of a giant company, but what should the small saver do? If I had 40% of my savings invested in shares, and asked you for advice after recent shocks, what would you tell me?
“I would tell you to reduce your exposure to the stock market significantly: for example if you now have 40% invested in the stock market, you should reduce the percentage to 20%. I’m not telling you to completely quit the stock market, but to reduce exposure to volatility which is going to continue. You should invest in government securities, for example in long-term government bonds which continue to represent a good opportunity”
However, the spread on the long-term government bonds is increasing: it means higher yields, but the perceived risk is correspondingly higher….
“The spread on Spanish bonds is increasing because Spain can’t manage to create a government; the spread on Italian bonds has increased due to worry about banks. These two issues can be resolved, and so I think that there are good opportunities for people who buy now”
The ECB assures us that it will slacken monetary policy even further. The Federal Reserve now seems to regret raising interest rates. Do Central banks still have weapons available or have they lost their fire power by now?
“Quantitative easing should continue and interest rates should fall into negative figures. But the longer we continue with these types of interventions, the less effect they will have. This is why countries – and especially European countries – need to make structural reforms in addition to the necessary, but insufficient, actions by central banks”.
“Very simply, the cost of doing business in Europe has to come down. Think of countries like France where these costs, that include taxes, are very high. Governments cannot reduce public spending to any great extent to do this, but they can take advantage of the drop in interest rates: the cost of servicing public debt has reduced considerably”.
You mentioned France, but what about Italy?
“I think that Renzi did a great job with the Jobs Act. However, we now need to deal with the bank problem that has been on-going for a number of years and needs to be sorted out. I don’t think that Italian banks are in a particularly catastrophic situation, they are certainly better than given credit for by a very jittery market. But the problem needs to be resolved: if the government goes ahead with the necessary reform, things will get better even in this area”.
However, it will be hard to implement reforms without keeping public debt at current levels or increasing it. Brussels, and certainly Berlin, would certainly not be very impressed.
“I think that Germany believes that the main problem for Italy to resolve – as with other countries – is to make the necessary reforms, with positive economic effects in the medium-long term. It is in the best interest of all the European partners”.
Yesterday, Janet Yellen’s speech gave us to understand that the Federal Reserve now envisages a more difficult future after having raised US interest rates. What do you think it will do?
“I seem to understand that if the Fed had raised interest rates beforehand, let’s say a year earlier, it would now be in a better condition to deal with a slowing down of the economy. I think that if it wants to retain credibility, it will have to make another slight increase, but it won’t raise rates four times this year as had been expected in the last few months, and after the first adjustment”.