Harshendu Bindal, president, Franklin Templeton Investments (India), tells Rajesh Bhayani that healthy profit numbers and a steady economy will help the Indian stock markets perform better than global peers. Edited excerpts:
After remaining range-bound for some time, the market has seen some action in recent days. Where do you think it is headed?
We don’t track short-term movements. Our medium-term outlook is positive because the earnings growth is good. The Indian economy and companies are much less leveraged than their peers in the West. Hence, they are unlikely to be impacted by the de-leveraging. Even balance sheets of companies are healthy. India’s valuations moved above average historical levels because of strong flows from foreign institutional investors in 2009 as global investors were attracted by India’s internal consumption and investment growth along with the potential for future growth.
Due to these factors, we think Indian markets are likely to continue to command premium valuations compared with peers. Over the medium to long term, they are likely to do well given the strong economic and corporate fundamentals.
Do you mean the global economy may continue to suffer?
The worst is over for western countries, but their economic growth may not be like that in India or China, as fiscal imbalances and low savings will cap their growth. This is reflected in the International Monertary Fund’s (IMF’s) projections for economies across the globe.
But equity markets in the US are also up significantly.
A lot of liquidity is flowing to all markets, including the US. This liquidity has led to asset prices moving up sharply. Commodity prices are already up significantly, which is a matter of concern. The so-called dollar carry trade (borrowing cheap in the US and investing in high-yielding assets in other economies) has resulted in movement of this cheap liquidity into emerging markets and high-yielding assets. At this stage, interest rates in the US are expected to remain low due to sluggish recovery. However, even if rates were to change, they will have a short-term impact on FII flows into India.
Do you think there could be a double-dip recession?
This is a worry, but no one knows the answer. No one wants such a situation. A lot depends on the way de-leveraging and winding down of global imbalances plays out. So far, a lot of long-term funds are coming to Indian markets and, hence, there isn’t much of a worry.
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Should investors be looking at equities now?
Equities are the best hedge against inflation. On the fixed income side, since inflation is rising and policy makers may increase interest rates, funds focusing on the short-end of the curve and floating rate instruments will be the best bets.
The mutual fund industry is facing a situation where it is not able to raise funds from retail investors as the ban on entry load has discouraged distributors. How do you manage, given that your branch network is limited?
We don’t think raising retail assets depends on branch network. It depends on ability to service distributors across India efficiently. Also, the new platforms coming up should help provide smaller distributors the support to maintain competitive edge and bring down transaction costs. The current issue facing the industry is the skewed asset mix as a majority of industry assets are in short-term funds (liquid and liquid-plus products).
What should be the road ahead for both regulators and the government?
We need enabling regulations allowing mutual funds to manage/advise insurance and pension assets in an efficient manner as these contribute a significant portion of industry assets in developed markets. Given that a majority of Indians don’t have access to basic financial services, it is unrealistic to expect rural/small clients to apply for a PAN (permanent account number) card when they do not pay taxes. One also needs to factor in the fixed costs for servicing investor accounts, irrespective of the size. Relaxation of these norms could boost financial inclusion.
While the household savings rate is high in India, most of these savings find their way into unproductive physical assets such as gold and real estate. There has been a gradual increase in the share of financial assets. This could be encouraged by providing tax benefits to channel the high savings into capital markets through financial institutions such as banks, mutual funds and insurance and also to fund infrastructure development. The government could look at providing tax benefits for retirement savings, children’s savings and health care (as prevalent in the West).
Overall, financial regulations in India need to have a uniform standard across players to ensure a level-playing field.
