The September quarter earnings will reflect the impact of the ongoing moderation of economic growth, rising input prices and higher borrowing costs says Sivasubramanian KN, chief investment officer, Franklin Equity?India, Franklin Templeton Investments in an interview with FE?s Muthukumar K. Excerpts:
Where are Indian stock markets headed?
Over the near term, market direction will be influenced by earnings, economic data and policy newsflow along with global developments, especially Europe. However, we expect markets to rally ahead of an improvement in economic fundamentals. While global uncertainty has led to increased risk aversion and impacted portfolio flows, we expect long term investors to increase exposure to India. Valuations are below long term averages?on a relative basis, compared to other EM countries. India tends to have higher valuations given the growth potential. Strong earnings growth, high RoE and low leverage should lead to increased confidence in Indian companies.
How do you expect the September earnings to be?
The new earnings season will reflect the impact of the ongoing moderation of economic growth, rising input prices and higher borrowing costs.
However, recent economic data suggests that consumer demand is still reasonably strong. Hence, we might see recent trends of strong topline growth with lower margins continue. Interest rate sensitive sectors are prone to larger downshift.
Earnings would however, begin to rebound as investment activity builds up momentum and interest rates peak.
What is your outlook on interest rates?
RBI?s statements clearly point towards an entrenched anti-inflationary stance. Economic growth is expected to slowdown in the coming quarters due to the combined impact of rate hikes and weak global environment. We don’t expect RBI to hike rates aggressively from these levels. If the global environment worsens, exports will be impacted but lower commodity prices could help India.
How do you see the European debt situation? What risks do Indian investors face if there is a global meltdown?
We do not see the sovereign debt concerns having any major impact on India, except in an indirect way due to change in global risk appetite and the impact on capital flows. 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.
Which sectors are you currently overweight on?
We maintain a positive stance on the domestic demand story and believe that sectors that can piggyback on the domestic consumption and investment themes are good opportunities from a medium to long-term perspective. We avoid companies in sectors such as real estate on account of the lack of transparency and limited earnings visibility.
What is the possibility of a QE3 and how could it impact Indian markets?
Given that credit growth has been anaemic, the Fed is likely to evaluate another round of quantitative easing. These are more relevant for the developed economies, but markets like India might benefit from the resultant increased global liquidity.
What are your expectations on oil prices and domestic inflation?
We might see energy and commodity prices starting to decline. In a fast growing economy like India, inflation will be an ongoing issue due to expansion leading to capacity utilization and infrastructure bottlenecks. We are going to witness these economic cycles on an ongoing basis, but the supply side constraints need to be addressed by the government to provide stability. Inflation in the short-term is not a concern, however the failure to address the structural issues certainly would be.
Which are the global cues to look out for?
US economic data and the developments in Europe will weigh on global market sentiment. Despite various structural issues, the global economy and companies are better prepared to tackle market volatility. There is no expectation of a 2008 type of drag on growth.