Correction opens upside despite earnings cuts: Franklin's Rengaraju

The recent spike in market volatility stems from a combination of several factors, says JANAKIRAMAN RENGARAJU, chief investment officer of emerging markets equity-India, Franklin Templeton Asset Management. In an interview with Samie Modak, Janakiraman discusses how easing valuations has opened up bottom-up opportunities across various market capitalisations (mcaps). Edited excerpts:

 

Recent months have seen increased volatility in domestic markets. What are the underlying causes of this volatility? 

The heightened volatility can be attributed to several factors. A key reason was the slowdown in the Indian economy during the July-September quarter, which led to weak corporate earnings. This slowdown was driven by a decline in manufacturing, with reduced capital expenditure (capex) and increased consumption.

 

 

Other contributing factors include geopolitical tensions, fluctuating inflation —particularly food inflation — volatile high-frequency indicators in India, the US presidential elections, and the steep valuations of Indian markets. Active primary markets and an increased supply of securities may have also played a role.

 

When do you expect earnings growth to pick up again after a weak first half in 2024-25 (FY25)? 

At the start of the financial year, markets were forecasting FY25 earnings growth for Nifty 50 companies to be around 15 per cent. However, it now appears that we may achieve only high single-digit earnings growth for these companies. Several factors contribute to this revised outlook. Firstly, government spending on capex has been weaker than expected. In the first half of the year, government capex is down by 15 per cent, leading to a shortfall of about ~1.4 trillion compared to Budget projections. This slowdown is likely temporary due to the elections and subsequent government formation in the first four months of the financial year. This shortfall has had a notable impact on earnings in capex-sensitive sectors, such as infrastructure and construction. Secondly, urban consumption has also slowed, which could be due to weak wage growth.

 

We expect the slowdown in government capex to be temporary, with spending likely to pick up in the latter half of the financial year. Looking ahead to 2025-26, earnings growth for Nifty 50 companies is projected to rebound to 13-15 per cent. This optimism assumes that government capex will normalise, urban consumption will recover, and broader economic conditions will remain favourable.

 

What are the near-term positives and negatives for the market? 

The new US regime has indicated a potential increase in global trade tariffs, which could impact global growth, including that of the US, India, and China. This may also influence US inflation and interest rates. The slowdown in private sector capex growth in India due to global trade uncertainties could further affect short-term growth. Other global factors affecting India’s growth include policy actions from China, interest rate decisions, US policy measures, currency risks, and geopolitical developments.

 

Macro-stability indicators are expected to remain within a comfortable range, providing policymakers with the flexibility to adjust strategies. We anticipate supportive policy shifts, including monetary easing and continued emphasis on public capital investment. US policy initiatives under the new president to increase oil production could help keep prices in check.

 

Which sectors or stocks could be impacted by Donald Trump’s policies, and what are the potential implications for Indian investors? 

Potential changes in US trade policies may lead to differentiated tariffs between China and other countries, including India. This could benefit some Indian exports at the margin. Investors should monitor new opportunities in sectors such as electronics and solar, alongside traditional sectors like pharmaceutical, information technology, and chemical.

 

The shifts in US involvement in global conflicts and geopolitical alliances could introduce uncertainties. Geopolitical uncertainty continues, and the change in the US government indicates that the coming months could be particularly eventful. Market volatility is expected, but the recent correction has created some upside potential, even with the earnings cuts.

 

What’s your assessment of current valuations? 

India’s valuations have risen over the past three years. Some areas have seen stretched valuations due to narratives around significant government spending, leading to unrealistic growth expectations. However, valuations have eased slightly from their peak in recent months, creating bottom-up opportunities across the mcap spectrum. The market correction presents investment opportunities as we seek quality compounding opportunities.

 

Are you making any significant sectoral shifts in your portfolios? 

The real estate cycle is expected to maintain its upward trajectory in the medium term. Corporate capex is projected to increase over the next two to three years, potentially boosting earnings growth and supporting equity markets. Also, new sectors are emerging, driven by advancements in digitalisation and sustainability initiatives. These sectors are poised to drive future growth and innovation, contributing to the broader economic landscape.

 

We remain positive on banking and the financial sectors, where the valuations relative to growth are favourable. On the consumer side, we believe in the premiumisation trend in the Indian market. In the automotive sector, this is evident from the rising share of sport utility vehicles.

 

Urban consumption names have faced some challenges recently, but we believe this is a temporary lull. We expect urban consumption to rebound as economic conditions improve. Broader economic drivers, such as rising per capita income and increased consumer spending, suggest that this sector will perform well in the medium term.