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It has been an eventful fortnight for equity and commodity markets across the globe. In the Indian context, the markets and investors have not only reacted to these developments, but have also fine-tuned their strategies in the light of economic, political and corporate developments. Sukumar Rajah, Managing Director and CIO-Asian Equities, Franklin Templeton Investments tells Puneet Wadhwa that in the Indian context, select segments of the market still appear undervalued. Though the growth trend is likely to improve over the next year, the return to high growth will be gradual, he adds. Edited excerpts:
How do you interpret the developments in Japan and the latest moves by the US Fed? What are the implications for the global equity, debt and bond markets over the next few quarters?
The unconventional moves and increased liquidity injections are a reflection of the concerted efforts (by central banks in developed markets) to boost growth. While the jury is still out on the sustainability and advisability of the policy shift in Japan, initial indications are that there is strong support to persist with the current policy.
The implied equity risk premiums have been at highly elevated levels indicating a deflationary situation and/or earnings collapse. Positive news flow out of the US and change in policy stance in Japan have reduced such fears, resulting in lower equity risk premiums and upmove in the equity markets.
Weakening Japanese yen would help improve the export profitability of the Japanese corporate sector and could have implications to regional trade/currencies, as other countries respond to protect their export competitiveness. The current developments seem to be favourable for the equity markets.
What do you make of the recent slide in gold and oil prices? Do you think the geopolitical tensions in the east will bring gold back as a safe-haven bet?
Gold and oil prices have been inversely correlated to the dollar. Fear of a dollar collapse had led to investors trying to diversify and increased inflows to categories like oil and gold. Given the higher confidence in the US dollar, it is unlikely that we shall see such strong flows to these two commodities in the future. From the data points we see in South Korea and elsewhere, it is unlikely that North Korea will trigger a big risk-off trade.
Have the commodity prices factored in a slowing Chinese economy?
Yes, it has somewhat been factored in but it is hard to conclude they have bottomed out.
What about the recent economic data from India? What are the chances things could turn for the worse?
We believe the economy is at the bottom of this slowdown cycle and growth should improve in the year ahead, helped by recent government policy efforts, lower borrowing costs and spending ahead of elections. Growth trends are likely to improve over the next year or so but a return to high growth will be gradual.
So, is it a good time to enter the equity markets?
We are strong believers of the fact that trying to time the market is impossible and fraught with danger. Investors should always focus on medium-to-long term outlook, and their investment objectives, rather than trying to time the market.
The long-term outlook for India remains positive. We think the current investment valuation case for India looks attractive. Headline index valuations are close to long-term averages of about 14-15x one-year forward PE and various market segments seem undervalued.
Do you think the markets are pricing in subdued earnings over the next few quarters?
At this stage, we believe that markets are fairly valued and unlike the start of 2012, earnings growth expectations are closer to reality. Earnings for India Inc have lagged nominal GDP (gross domestic product) growth over the past few years and this is expected to change in the coming year.
The fall in global commodity prices and easing borrowing costs should have a positive impact over the near term. The medium-term outlook depends on the evolving macro situation, both in India and overseas. Earnings dispersion is expected to remain high across sectors and hence believe investors are better off adopting a bottom-up, fundamental research focus - quality of management/balance sheet will be important.
What has been your strategy regarding rate-sensitive stocks, especially banks?
Indian banks have performed well over the last few years and particularly those in the private banking space remain well-placed in terms of asset quality and capital adequacy. We have always been wary of the PSU banks. India's financial sector will be one of the key beneficiaries of rising incomes and the growing demand for financial services/products. In addition, efforts to promote financial inclusion and increasing comfort with market-linked investments are positive for the sector.
