While markets have rallied on account of the recent policy changes at the domestic level and the gush of liquidity, participants have been keenly watching developments in the political arena. Sivasubramaniam K N, chief investment officer (equity) at Franklin Templeton Investments India, tells Puneet Wadhwa, as the deleveraging process plays out and the global economy recovers, markets are likely to move higher. However, volatility cannot be ruled out completely, he adds. Edited excerpts:
How have the world economy and markets shaped up in the first half of FY13? Do you see a gradual decline in sentiment now, as the euphoria fades off?
Encouraging news flow on the policy front has helped global markets move up in recent months and overcome weak economic data flow. While the recent measures by leading central banks and European policymakers are positive, one needs to note that the process of correcting macro imbalances is a long-drawn one, with many high and low points.
Over the next few months, the US fiscal cliff and political transition, along with news flow out of the Euro zone and China, will be key drivers of market direction. Volatility cannot be ruled out completely over the near term but as the deleveraging process plays out and the global economy recovers, markets are likely to move higher, in tandem with improvement in fundamentals.
In the Indian context, has the political fallout of the reform process been contained or do you think the next round of policy decisions could make things worse for the government and markets?
At this stage, political risks appear manageable with the government managing to rope in the support of some other parties. It is, however, difficult to comment on the ability of the government to sustain action and potential impact from further policy decisions. This would depend entirely on the nature of the decisions taken. Unpopular measures, despite their urgency, might be pushed back.
What’s your assessment of the measures announced by the government and the Securities and Exchange Board of India (Sebi)?
Broadly, the measures announced are positive and the discussion about creating a long-term policy framework for mutual funds is encouraging. While recent measures can help on “push side” demand, we will need “pull side” demand (read long-term savings and tax benefits) along with relaxation of KYC (know your customer) norms to create structural changes that can benefit the industry, as well as the Indian economy, over the long term.
Globally, access to the long-term savings pool, especially mandatory retirement savings, has been a key driver for mutual funds. Given the long-term nature of these savings, they hold more relevance to equity funds.
Is it a good time to invest in the power and retail sectors, given the recent announcements?
The recent move to restructure debt of state electricity boards (SEBs) is broadly positive for various companies in the power value chain, as well as for banks/financial institutions (especially the public sector ones) that have been financing the losses.
The restructuring package, along with the recent relaxation in foreign direct investment (FDI) norms for power exchanges, indicates the government recognises the need to boost the power sector to meet India’s energy needs.
However, from a longer term/ structural viewpoint, it’s important to consider measures to address the uncertainty about coal linkages, land/environment clearances and liberalised pricing regime. This should provide a boost to the power sector as a whole. Further, any move towards privatisation of SEBs can potentially set the ground for sustainable growth.
As a strategy, would you still prefer pharma and healthcare stocks, despite the run-up against high-beta names?
Stock prices of consumer-oriented businesses (staples/discretionary) and healthcare companies have benefited from a broad environment of risk aversion, policy uncertainties and economic slowdown. Valuation in some pockets appears stretched now.
However, we believe the banking sector presents good long-term growth potential.
Notwithstanding short-term trends, we believe banks, particularly those from the private sector with a strong management team and business model, are a good bet.
What are your expectations from the September quarter results?
We don’t expect earnings trends to be significantly different from those seen in the previous few quarters – margin pressures will likely persist, but top line earnings growth should remain robust, especially in the FMCG (fast-moving consumer goods) space.
Data indicates growth in capex/infrastructure project implementation remains weak and in that sense, earnings for the sector could continue to be under pressure. Overall, given the current macroeconomic environment, big upside surprises on earnings are less likely this financial year. These could kick in later next year, as the effect of recent measures percolates and the economy bottoms out.
Also, as we have seen over the last year or so, performance differential across companies is expected to remain high, and those with sustainable business models and healthy balance sheets should continue to outperform the rest.
What about crude oil and the rupee? Could these two prove to be a sore point for the markets in the quarters ahead?
Over the last few weeks, trends have been quite positive on the external front for India. The recent spate of reform measures has helped the rupee appreciate against the US dollar, while crude oil prices have edged lower on concerns about demand slowdown.
The sustainability of these trends is questionable – it needs to be seen if slower emerging market (EM) growth will be able to offset upsides in crude oil prices due to any increase in geopolitical tensions in West Asia alongside liquidity flows amid an easy monetary policy environment. At the same time, the rupee is vulnerable to downside emanating from increased global risk aversion and/or deterioration in domestic economic/policy newsflow.
