Now is the true test of the SIP cycle: Franklin Templeton's A Radhakrishnan

We may see some moderation in ticket size of systematic investment plans, says Anand Radhakrishnan

A cautious Anand Radhakrishnan, Managing Director and Chief Investment Officer, Emerging Markets Equity (India), Franklin Templeton, says it's still too early to say if the market correction is over. In an interview to Hamsini Karthik, he affirms that now is the true test of the systematic investment plan cycle. Edited excerpts:

Does the current trend suggest that deep market corrections are behind Indian equities?

The breadth of market correction is certainly not reflected in the movement of the Nifty. There are many stocks in the broader market, which have gone through a meaningful drop in the value. Sensex and Nifty, being driven by 8-12 large-cap stocks, seem to have glossed over this correction.  

However, this is beginning to change as market participants attempt to tally prevailing valuations with realistic future earnings. When the next wave of buying happens, I expect some rotation in the outperformers. However, it’s still too early to call out if the market correction is over. 

The impact falling oil and a rising rupee will have on the market...

This is already having a positive impact. We need to wait till oil prices eventually settle down. 

Also, no investor would like to put money in a country where currency risk is high. I expect reversal in sentiments to happen post elections as the upcoming elections will be different for the market. The reason being, last elections, foreign investors took the event risk, ahead of an election. They played that trade and made money. 

This time, nobody wants to take that risk, because we don’t know if a change will be good or bad.

Currently, domestic investors are buyers in India as they are hopeful of the current government returning for a second term.

You’ve in fact been vocal in calling out the correction in NBFC stocks as much-deserved…

When a sub-sector is growing at a very high pace, a regulator should normally get worried. Non-banking finance companies (NBFCs) took up the slack created by banks which were under prompt corrective action and the government and regulator thought someone was propelling growth, why spoil it? But they weren't looking at where the NBFCs were lending. Banks which were borrowing at 6-8 per cent were lending at 12-14 per cent for individuals and SMEs, while NBFC were borrowing at 6-8 per cent and lending at 18-20 per cent. 

Those who weren't getting credit from banks — such as micro finance, vehicle finance were being funded by NBFCs, which is understandable. But home finance and lending to small and medium businesses are areas banks would have more information on the asset quality and direct control over the cash flow of the borrowers. Why should NBFCs replace banks there? The regulator and government should allow market forces to help in course correction. Excessive intervention isn't good as bad assets might balloon and become a bigger problem.

How have you fine-tuned your portfolios since September?

Most of our portfolios underperformed the benchmark, except for the mid- and small-cap fund. To compound this, we are also overweight on telecom and underweight on petroleum products. So we got whiplashed on both fronts. 

Some of our stock specific calls also didn't work well. We have some exposures in financials which got hit, though we didn't have much exposure to non-banking finance companies (NBFCs), especially those NBFCs where markets have concerns like real estate financiers. Some of the banks we own may have direct or indirect exposure to NBFCs. So some part of the course correction has already happened.

How far are we from facing redemption pressures for equity MFs?

We may not see an evident redemption pressure. But lump sum investments that came in during the peak of 2017-18 will get challenged. We may see some moderation in ticket size of systematic investment plans (SIPs). 

The industry will have to go through these periodic ebb and flow. In fact, now is the true test of the SIP cycle. This is the first time we will see how SIP investors react to market correction. But a lot of exotic and riskier strategies have been launched in the portfolio management services (PMS) and some alternative investment funds (AIF) segments and they could get redemption pressure ahead of pure-play mutual funds (MFs).

MF vehicle is increasingly positioning itself and being perceived as a more stable, standardised and the go-to investment avenue for retail investors.  We’ll only see some moderation in flows but not as much a redemption pressure like 2008.