LICowns 4% of the entire equity market and 2% of the bond market. So, every time the market or bond yields move, its fortunes change.
- LIC is to be severely impacted by potential hike in interest rate this month.
- This is because LIC’s AUM consists of about 75% of debt securities making it very sensitive to fluctuation in interest rates.
LIC might be an elephant that cannot dance, but when it does, it moves just the way the stock market does. Unlike any other company which is valued for the industry that it belongs to and its own financials, LIC’s valuation is determined by a large number of macroeconomic factors and the benchmark indices are one of them.
LIC owns 4% of the entire equity market and 2% of the bond market. So, every time the market or bond yields move, its fortunes change.
“LIC is a very good investment but it is not being able to pull its way because of market sentiment. It is a perfect mimic of the market. Like if Nifty 50 goes up to 18,000 points, LIC’s share price will be ₹900,” Sanjiv Bhasin, director at IIFL Securities, told Business Insider India.
The mega mutual fund promoted by Government of India
LIC manages more than half of the life insurance policies of the country. As and when their premiums come in, it diverts these massive funds into various forms of investments be it debt or equity — making it a mega investor.
In its maiden report on the company, Emkay Research said that LIC is more like a mutual fund, promoted by the Government of India.
“LIC has been running more like a mutual company where the promoter shareholder — Government of India had not infused capital and the corporation was running on policyholders’ funds and even the solvency capital was in the form of excess in policyholders’ funds,” the Emkay report named ‘The Elephant can’t dance’ said.
LIC currently manages assets worth ₹40 lakh crore — that’s more than India’s entire mutual fund industry combined.
It also owns a large stake in blue-chip companies like Reliance Industries, TCS, L&T, SBI and even ITC. So every factor be it oil price movements, tech meltdown, interest rate regime and even tobacco prices have to be priced in while evaluating
LIC’s largest shareholding is in IDBI Bank — which is 49.24% stake. This year, the bank’s stock is down by 21% so far and its largest shareholder will have to bear its brunt as well.
RBI’s interest rate hikes and its effect on LIC
After announcing its ‘interest rate shocker’ just before LIC opened its IPO for bids, the Reserve Bank of India too might play another spoilsport for the Navratna company’s stock.
The market is expecting yet another interest rate hike from RBI governor Shaktikanta Das. It is expected to be higher this time around — between 40-60 basis points — and that would leave a deeper wound in LIC’s books.
Increasing or decreasing interest rates can materially affect the profitability of LIC again because of the assets it manages. As much as 75% of its overall assets under management consist of debt securities.
“A rising interest rate environment could lead to higher levels of surrenders and withdrawals of existing policies as policyholders would seek to buy products with perceived higher returns, which would result in investments being sold at declining prices in order to make payments to the policyholders, in all leading to financial losses,” explains a report by Emkay Research.
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