Despite the toned-down estimates, Sukumar Rajah, MD and CIO–Asian Equities, Franklin Templeton Investments, tells Puneet Wadhwa that India maintains the lead in economic growth vis-à-vis most of its peers and the regulatory risk will reduce. The current environment is ideal for bottom-up stock pickers, he says. Edited excerpts:
How do you see the global equity markets panning out over the next few quarters?
Global equity markets are expected to remain volatile, given the overhang from known issues such as Europe’s sovereign debt, as well as the ongoing slowdown. While the situation in Europe remains uncertain, policy makers are unlikely to sit on the sidelines. Hope for substantial policy response has been supporting markets amidst the negative news flow in terms of Europe and anaemic economic data.
What about India? Do you think the reversal of fund flows seen in July will continue? How do we compare India with the other emerging markets (EMs) as an investment destination?
The Indian equity markets have bounced back since June, helped by strong foreign inflows. The sustainability of these flows will depend on global developments, especially policy measures in the developed markets. The recent macro-economic problems have been largely local in nature and require the government to change the perception on the policy front.
Despite the recent slowdown, India maintains the lead in economic growth vis-à-vis most peers. The key differentiating factor is obviously the large share of domestic demand in overall GDP (gross domestic product), that can help the economy remain relatively resilient in the wake of a sharp slowdown in global economy or deterioration in the Euro zone crisis.
In our view, global investors with a long-term perspective remain positive about India and would look at sharp corrections as buying opportunities.
What is your interpretation of the recent statements from the various central banks? How do you see the interest rate cycle panning out in India?
The Federal Reserve and the ECB have made it very clear that they will ensure adequate support to the economy and financial markets, and avoid any deflationary situation. However, compared to 2008, the range of monetary tools available to them is limited and they need to resort to creative ways.
The Reserve Bank of India (RBI) is faced with a different set of issues. It is concerned about the fiscal deficit and feels that any further cut in rates will only add to inflationary pressure. In that sense, interest rates are likely to remain at these levels, unless there are clear policy measures towards fiscal consolidation and a perceptible shift in core inflation drivers.
What will be your investment strategy in such a scenario?
The investment strategy would depend on the individual fund’s objective and investment style. We continue to believe that Indian equities offer a good long-term investment opportunity from current levels (markets are trading below historical 10-year average in terms of valuations).
In terms of sectors, our investment style is based on a bottom-up, fundamental analysis. Hence, our focus is more on the individual companies. At a macro level, we continue to believe that the long-term drivers will be consumption and investment.
Our focus has been to generate alpha through bottom-up fundamental research. The recent moderation in growth in select segments, including auto, reflects the impact of high borrowing costs and slower growth in the economy. We are focused on delivering across market cycles and drivers such as consumption, investment and exports. However, if price corrections result in very attractive valuations, then we will consider gaining exposure to those stocks.
We remain overweight on telecom, as regulatory and other issues have impacted the sector while the economic slowdown did not impact the revenues too much.
What about the banking / financial sector and the valuations these stocks are available at? Are there any stocks that make it to the investment list?
Financial services and private banks have also corrected and hence, on a relative basis, there is value in private banks.
Over the last few years, the RBI has announced varied policy changes with a view to upgrade the system’s ability to withstand crisis and improve efficiencies. Some of these changes may be short-term negative for the sector. However, they are positive from the long-term viewpoint and in that sense we are not unduly concerned.
What is your assessment of the June quarter results of India Inc thus far?
The trend has largely been similar to those seen in the last few quarters. Companies have delivered fairly robust performance on the top line front, but sustained margin pressures have impacted the bottom line gains. Overall, quality businesses continue to maintain a healthy growth profile and are well-placed to benefit from the economic upturn. We believe the current environment is ideal for bottom-up stock pickers.
The Cabinet Committee on Economic Affairs (CCEA) has taken a few important decisions spanning a host of sectors, such as sugar, power and stake sale in SAIL. Do you see this as a sign of reforms getting back on track?
There seems to be increased urgency within the government to improve policy perception, and we think the government will make some progress to this end in the coming months. In case of some of the big reform proposals the government is in the process of building consensus – this could be a time consuming process and hence the timing/pace of changes here may be slow to come by. We think over the medium to long term, the regulatory risk in India will reduce.
