Equity markets have corrected by more than 3% over the week. But, in an interview conducted just a day before the 467 points fall, Sivasubramanian KN, head of equity portfolio management, Franklin Templeton Asset Management (India), told FE?s Muthukumar K that he sees the pick-up in non-oil imports, credit growth and auto sales as indicators of economic growth gaining momentum. The government?s plans to boost infrastructure spending will provide a further impetus to corporate investment. However, in volatile market conditions like now, he suggests staying away from cyclical stocks and having some exposure in defensive sectors such as FMCG and healthcare that tend to outperform markets in these times.
What is your view on the initial set of corporate earnings that were announced?
The earnings season has been mixed so far?the overall growth has been fairly good, but mixed trends have been witnessed across different sectors. Technology, capital goods, auto and banking companies delivered a positive set of numbers while those in the refining and FMCG space reported lower growth. Banking firms expect strong growth to continue in the current fiscal aided by uptick in credit demand and possibility of higher fee incomes amidst improved financial market environment. Infrastructure companies? performance has been mixed?while earnings seem to have been impacted by the rise in input costs and execution delays, some companies have reported better margins on the back of stringent cost control.
How would the Eurozone crisis and its recent $1 trillion package affect the global markets?
We do not see the sovereign debt concerns having any major impact on India/Asia per se, except in an indirect way due to the change in the global risk appetite climate and through the impact on capital inflows. In that sense, even as the region experiences stronger growth, market direction is likely to be influenced by global factors and any negative development could weigh on returns.
There are also expectations that the accommodative monetary environment is likely to remain in place for more time than initially expected, putting pressure on the euro.
Could you elaborate on relative valuation in emerging markets?
The strong rally since 2009 has pushed up valuations close to long-term averages in many of the emerging market (EM) economies. However, we believe that these markets (especially Asia) deserve a valuation premium compared with markets in the US and Europe, given the relatively stronger economic fundamentals. Apart from the economic resilience exhibited by Asia?s leading economies, it is clear that the region doesn?t face the same systemic risks like the developed world (higher leverage levels for the households and companies, low saving rates and large deficits in developed economies). We expect consumption and infrastructure spending to drive economic and earnings growth across the region.
What is the outlook for equity markets? Are valuations currently on the higher side?
While domestic economic/ earnings data is likely to remain positive, the markets direction will be influenced by global factors (read: liquidity/ risk appetite) in the near term. Also, at these levels, valuations are not excessive from a medium to long-term investment perspective.
On an absolute basis, valuations are close to the long-term average of about 18x based on forward earning expectations and given the strong growth economic growth potential over the medium to long term, valuations do not seem running ahead of fundamentals. In addition, corporate India?s healthy track record in terms of return on equity (ROE) as well as greater proportion of domestic demand component in earnings warrants a valuation premium for India.
Are there signs of investment cycle picking up?
Recent data clearly indicates that economic activity has improved further, aided by the bounceback in industrial production and stable services sector activity. Other indicators such as non-oil imports, credit growth, auto sales, among others, suggest that economic growth is gaining momentum. The government?s plans to boost infrastructure spending should bolster the investment cycle and corporate investment should also pick up.
RBI is likely to raise interest rates in the future. What impact will it have on earnings and markets?
Given the increased global uncertainty, RBI might not resort to aggressive monetary tightening and the recent measures are not expected to result in any sharp increase in borrowing costs. Even if liquidity tightens significantly in India, easy global liquidity and strong balance sheets (read: relatively lower leverage) should help fundraising of companies. Towards the latter part of this year, sustained rate hikes and accelerated growth in credit offtake could lead to higher borrowing costs for companies.
Commodity prices are cooling off, particularly the base metals. Any comments?
The sovereign credit crisis and policy responses in the form of austerity measures have led to expectations of slower-than-expected economic recovery in places like Europe. Also, concerns about the impact of China?s tightening on global demand have impacted commodity prices. Overall, we believe this would be a short-term phenomenon. Global economy appears to be recovering well, led by growth in emerging markets and this would eventually lead to higher demand for goods and services.
Which sectors are set to do well and which are the ones to avoid?
As a firm, we follow a bottom-up approach to stock selection and do not believe in taking sectoral calls. From a medium to long-term perspective, areas benefiting from structural growth drivers like consumption and infrastructure are likely to fare well, in our view. However, in volatile market conditions such as those seen in recent weeks, historical data suggests that typically defensive sectors such as FMCG and healthcare relatively outperform markets, while cyclical stocks are rather severely hit during periods of high volatility.
Are we raising record money through divestment this year? Could it affect the secondary market inflows?
The current issuance pipeline of India?s private and public sector companies adds up to over Rs 900 billion (Source: CLSA Asia-Pacific Markets). This will have an impact on the market. However, the recent market volatility has led to many companies deferring their plans.
Are IDRs being floated into equity markets? Aren?t retail investors being taxed on long-term capital gains when mutual funds aren?t?
These issuances are an interesting development and help Indians get exposure to MNCs that benefit from the strong growth in India. Taxation issues are expected to be addressed through the new Direct Taxes Code.
What are the global cues to watch out for? Is the global economy out of the woods yet?
The worst is probably over for the global economy and most global research houses/multilateral institutions have increased global growth forecasts. However, there are pockets of concerns?the global economy is expected to witness an uneven recovery with differing growth rates across geographies. While developed economies seem to have stabilised, labour markets remain under stress and capacity utilisation stuck at very low levels. Besides, given the complexities and inter-linkages, it is difficult to gauge the impact from issues pertaining to sovereign debt in the advanced world, regulatory reform and stimulus unwinding. Meanwhile, fast-growing emerging markets are expected to remain resilient and retain the recent positive growth momentum.
Why are retail investors staying away from the market? Why are equity inflows into equity schemes post the entry load ban negative?
Pricing is only one of the aspects that impacts demand for mutual fund products?a lot depends on investor sentiment as well. This is reflected in the fact that while gross inflows have picked up strongly since mid-2009, redemptions have led to negative net flows. However, we have seen strong inflows whenever the markets have corrected.
Market volatility since 2008 has had an impact on retail trading volumes, but retail flows through financial products such as insurance and mutual funds have continued unabated. In that sense, we are probably witnessing increased participation through professional managers rather than direct trading.