Indian markets will not disappoint investors as long as they have realistic return expectations and a longer time frame, R Janakiraman, chief investment officer – emerging markets equity – India, Franklin Templeton, tells Ananya Grover in an interview. He says a large supply of IPOs and geopolitical tensions are some of the risks. Excerpts:
After the recent corrections, Nifty is back to its peak levels. How will you describe the current market?
It is a consolidating market. From the demand perspective, after Covid-19, the surge in the pent-up demand peaked towards late 2023. In the next one year, it started to gradually slow down and probably the trough of the slowdown happened in September 2024. Now, there is a gradual recovery. Consolidation is in the form of earnings also. We saw a slowdown in earnings in FY25. To some extent, that slowdown was triggered by a slight weakness in government spending, which is now on the path of recovery.
Another way to see the market is the broad market return, represented by the NSE 500. One or three-year index returns are not very far away from the underlying earnings growth. So, we are not starting from a point where the PE ratio is at a high level, which puts a drag on prospective returns. Moderate earnings growth is expected over fiscals 2026 and 2027. On the back of that, you should see equity returns which are almost in line with earnings growth. That is what I expect for at least for the next one year.
Are valuations in the mid- and small-cap space expensive?
Definitely. If you look at the index level, valuations do look a bit more expensive compared to large-caps. But what they also offer is higher earnings growth than large caps. So, it is up to the investor or portfolio manager to decide on the nature of stocks in her portfolio keeping in mind return expectations. But you have to be careful about the combination of what kind of valuation premium you are paying and whether you are getting commensurately adequate earnings growth in return.
Do you see any concerns over macro-level growth? What are the factors that can affect markets?
Our macro numbers are looking rock solid. Domestic inflation, fiscal deficit, current account deficit, forex reserves, the headroom to cut interest rates – all these metrics are now looking better. A large supply of papers from IPOs or promoter sell-downs is a meaningful risk, which also played out in September 2024. When the market turned weak subsequently, the supply abated. Now, it is coming back as the market is rising. While we definitely need more choices through IPOs, too many IPOs in a short span can hurt equity returns. Beyond that, the risk is more from geopolitics.
What will be the impact of Trump tariffs on the Indian market?
When Trump initially announced the tariff, the extent of the impact on India was seen lower compared to others given limited lower exposure to exports. I think the geopolitical tension between the US and China is not going to go away anytime soon following the tariff issue. That means Western companies are now pushing their efforts to diversify, reducing their dependence on China sourcing, which is a big opportunity for us.
From September to March, FIIs withdrew big from Indian markets. That changed from the first fortnight of April. It was because of the fact that in the post-tariff world, India’s relative attraction has grown. But there will be weakness in the US towards the end of the year. It will affect the Indian markets more than the Indian economy.
What was your strategy during the recent correction?
In September 2024, the market was at a relatively high valuation and many of the good-quality businesses were priced for perfection. It was difficult to find a good margin of safety in equity asset prices. Then the correction started, and towards February and March, we saw several of these good-quality names were available at better valuations. Many of them suffered a 20-30% correction compared to September levels. We added to or created exposures to sectors like energy, utilities, power, infrastructure, consumer discretionary and apparels. Some of the small and mid-cap industrials also received exposure. That phase got over a bit too quickly. Now, the focus shifts to the core aspect of earnings growth and this has been influencing our portfolio construction.
Where would you advise investing in the current market?
The ability to invest in equity during a correction requires a reasonably unemotional behaviour. You should be prepared to invest in times of uncertainty. At this point, I will advise spreading out investments. Classic SIP is a very effective way to invest in current markets. I’d invest in the broader market, not go totally into large caps, nor heavily into small- and mid-caps either. The NSE 500 has a 70-30 mix. I think that gives you enough exposure to small- and mid-caps without taking too much risk.