The crisis in Europe has resurfaced in the past few weeks. However, despite the global headwinds, Asia remains relatively insulated because of its low leverage and high forex reserves, believes Sukumar Rajah, MD & CIO ? Asian Equities, Franklin Templeton Investment, India. In an interview with Ashley Coutinho, Rajah says the recent slowdown in FII inflows into India is in line with global trends. Excerpts:
What is your outlook for the Indian equity market?
Apart from the global situation, domestic policy and inflation headwinds have impacted market sentiment negatively. Clarity on the policy front and progress on various reforms ? land acquisition, FDI in multi-brand retail and taxation, among others ? can help revive the capex cycle and lift investor sentiment.
The other key concern is inflation. While headline inflation rates have eased over the last few months, rising global energy prices and a weak rupee are adding to inflationary pressures. However, the overall India growth story remains intact for the medium to long-term, and we recommend that investors adopt a 3-5 year view on their equity investments and invest systematically.
What is your view on earnings?
Over the last year or so, earnings trend for corporate India has been divergent across sectors and quality companies have fared relatively well compared to the rest of the universe. We expect this divergence in performance to continue. At a broad level, corporate India will continue to face challenges on the margins front. Topline growth may remain firm, especially in consumer-oriented businesses, given still strong underlying private consumption trends.
How do valuations for the Indian market compare with its Asian peers?
After rallying sharply in the first two months of 2012, Indian equities have been under renewed pressure amid policy and macro-economic concerns. From a historical viewpoint, Indian markets are reasonably valued and most of the negatives seem factored in. The valuation gap with other EM/Asian countries has contracted to some extent, but India continues to enjoy a valuation premium due to the quality of earnings, prior track record and low degree of leverage. Corporate India?s balance sheet leverage has declined.
Do FIIs still find Indian market attractive?
The recent slowdown in FII inflows into India is largely due to renewed fears around Europe and concerns about global growth amid rising commodity prices. For India, additional issues in terms of policy and foreign investment taxation norms have weighed on the markets. We don?t expect the S&P change in outlook to have a significant impact and investors might focus on individual company fundamentals rather than sovereign ratings.
Notwithstanding, India continues to be one of the most attractive investment opportunities for long-term investors and many of them are likely to increase exposure at attractive valuations.
Which are the global cues to watch out for?
The increase in global liquidity through quantitative easing along with positive economic newsflow from the US, has driven equity markets higher in 2012. While the Euro crisis seems contained at this juncture, the underlying problem has not been resolved. There is increased resistance to austerity measures and this was reflected in the recent political developments in France and Netherlands. Policymakers will need to balance the need to cut deficits through austerity measures and sustaining growth momentum.
China?s growth seems to be slowing. How do you view the situation?
The government has exhibited its ability to steer the economy well in the past and is likely to continue to do so in the future. Domestic consumption has been increasing strongly helped by the rise in disposable incomes. From a medium to long-term perspective, we are positive on the China?s growth prospects and our exposure (in Franklin Asian Equity Fund) is more so towards well-managed companies benefiting from the consumption trends.
Countries such as South Korea have attracted sizeable overseas inflows this year. What are the factors driving inflows into these countries?
The South Korean economy has been quite resilient despite the dependence on exports and the country is home to some of the world?s largest conglomerates, especially in the electronics space. Some of the other markets in the Asian region that have attracted global investor interest are Indonesia, Thailand and Taiwan.
Overall, Asia remains relatively well-placed compared to global peers due to the low leverage and high forex reserves. Despite the strong fundamentals, increased risk aversion has weighed on regional equity markets and currencies. Market valuations remain attractive from a long-term investment perspective.