India?s macro-economic environment is likely to turn positive over the coming quarters, says Sivasubramanian KN, chief investment officer, Franklin Equity ? India, Franklin Templeton Investments. In an interview with Ashley Coutinho, he says current valuations provide a good opportunity for long-term investors to enter the equity markets.

What is your outlook for the equity market?

The positive global sentiment, interest rate cuts and strong FII flows have helped Indian markets rally over the last month or so. While this has happened with no material change in economic fundamentals, we believe the macro environment is likely to become positive over the coming quarters. Return to high growth rates, however, will be possible only over the medium term. Given the strong long-term growth fundamentals, the markets provide a good entry point for long-term investors at current valuations of about 14-15x one-year forward earnings.

What is your assessment of the Q4 results so far?

The latest earnings reports were lacklustre and reflected the impact of moderating consumer demand. The results were particularly downbeat for infrastructure and capital goods, FMCG, auto and consumer discretionary (particularly auto) sectors. In contrast, healthcare and IT services, except Infosys, reported good set of numbers. In our view, the latest results are unlikely to spur large downgrades in consensus earnings estimates and the disinflationary trend, along with lower interest rates, is likely to help corporate margins improve over the next few quarters.

What are the key triggers for the market?

The turnaround in the economy, along with lower interest rates and a positive global sentiment, point to a better environment for corporate India. However, there is a need to address structural gaps to ensure that the higher growth trajectory is sustainable without unleashing inflationary pressures.

Political developments would be the key risk over the near term, as in the current situation, it may be difficult for the government to push through major reforms. The real impact of such measures, however, will be visible only in the medium term. So, while we expect growth trends to improve over the next year or so, return to high growth levels is expected to be gradual.

FIIs have put in more than $15 billion into equities year to date. Do you believe strong inflows will continue in the year ahead?

The FII inflows need to be seen in the context of an easy global liquidity environment and near-zero interest rates. Global investors are on the look-out for strong investment opportunities that can play out in the next decade or so, and India certainly qualifies.

Despite the recent slowdown, India remains one of the fastest growing economies and its large dependence on domestic demand for growth is a positive. Corporate India?s strong RoE (return on equity) relative to peers is another factor.

What are the global cues to watch out for?

Central banks across the globe have been aggressively easing monetary policies and injecting liquidity in the hope that a positive environment will kickstart the sluggish capex and credit cycles, and boost global economic activity. However, policymakers continue to face challenges in balancing the growth boosters with the need to consolidate fiscal deficits, amid continued de-leveraging in the developed world. Whilst the US economy has been exhibiting signs of growth, Europe and Japan are yet to witness a turnaround. The outcome of these policy efforts will shape the direction of global flows in the coming years. For India, the level of commodity prices along with portfolio flows will be the key triggers to watch out for.

Which sectors are you betting on?

At a broad level, we are positive on the domestic consumption and investment themes as well as the financial services sector. In our view, the long-term growth outlook for the financial services theme remains positive given the present day low penetration of banking and other financial services among Indians. Similarly, we are also finding opportunities in the healthcare space. We are also positive on the housing and construction segments, but we continue to stay away from pure real estate plays and, instead, play the opportunity through ancillaries such as paints and cement.