Franklin Templeton: Positive on Markets Over Medium to Long Term

Anand Radhakrishnan, Senior Vice President and Portfolio Manager - Equity, Franklin Templeton Investments, says stocks are trading near long-term averages after the run-up this year and that bottom-up opportunities still exist.
By Priyadarshini Dembla |  18-12-12 | 

Morningstar spoke with Anand Radhakrishnan, Senior Vice President and Portfolio Manager - Equity, Franklin Templeton Investments, who manages funds such as Franklin India Bluechip and Franklin India Prima Plus, among others, to get his view on how he sees the market's performance this year, his outlook going forward and his investment strategies.

How would you sum up equity market's performance in the calendar year so far and what is your outlook?

Indian equity markets have had a good year so far--improved global investor risk appetite along with recent policy reforms have helped equities register sharp gains and outperform many EM/developed peers.

The government's success in pushing multi-brand retail FDI through the Parliament, could provide the ruling coalition the requisite momentum to push through further reforms in coming months.

In our view, there is clearly a need to address structural issues weighing on investments, as well as need to deal with the high inflation and fiscal deficit. There is also a need to encourage long-term savings as well as channel them into productive sectors of the economy.

Over the near term, we believe market movements will be dependent on policy progress and FII inflows, apart from global developments. We continue to believe that the long term India story remains intact, and as near term growth issues are addressed, the economy should find its way back to high growth levels.

In that sense, the long-term direction for markets would be positive, however over the short term, we could see small corrections and consolidation due to the various factors mentioned above.

What do you think of the current market valuations and would you be comfortable buying at these levels? Do you see further downside from here?

Following the recent rally, Indian equity markets are trading at or near long-term averages, but there seems to be value across various pockets of the market. In our view, one can always find investment opportunities regardless of market conditions through rigorous research and analysis.

To that extent, it has not been tough to build a bottom-up based portfolio in the current market conditions. While downsides to market are possible, our view is that it would be limited unless there is large scale unforeseen uncertainty.

Concerns on the global front continue to persist? What according to you would be its impact on the Indian markets?

Policy newsflow from across the world has been quite encouraging over the last few months and has bolstered investor sentiment. Policymakers now need to work towards efficient execution and announce tangible measures to further address structural issues--while global imbalances have wound down from 2008 levels, they remain a key challenge. Balancing growth prospects with the need for fiscal consolidation is a tough act.

In that sense, the process of correcting macro imbalances will be a long drawn one with many high and low points. Both Indian and global markets could hence be subject to volatility at various points in time, but the overall direction should continue to be positive over the medium to long term.

What is the biggest risk to Indian markets in the current scenario?

 Over the near term, key risks from a market point of view are political wrangling on key reforms and any major negative newsflow from US/Europe.

According to you, how has the earnings season been so far and what do you expect in the upcoming quarters?

Corporate India's earnings performance last quarter was along expected lines--topline growth remained stable and downward pressures on margins appear to have peaked out. FMCG companies and private banks continued to report strong growth, while results from the IT services sector were a mixed bag, with only select players reporting good performance in a slower growth environment.

There was some evidence of slowdown in demand for consumer discretionary goods--consumer durables and autos. In the capital goods space, select large players reported robust performance and appeared relatively positive (compared to past) about pick-up activity in over the next few quarters. Players are looking forward to establishment of the proposed National Investment Board, a committee with the mandate to expedite clearances for large investment projects.

Looking ahead, we think continued abatement in price pressures and easing borrowing costs should help earnings trends improve. Consolidation amongst players is another key factor that we think will drive earnings growth going forward.

However, gains are unlikely to be rapid and uniform across players and therefore there will continue to be increased stock-level differentiation.

Over the past couple of months, government have taken determined steps towards economic growth and fiscal consolidation. Are these measures enough to propel growth? In your opinion, what more should government do to stimulate growth and keep fiscal deficit under check? Is execution of these reforms a challenge according to you?

As mentioned earlier, the government's move to change perception of policy inaction is a positive. As always, policy execution will be a key determinant of the economic outcomes and investors will keenly monitor developments. The impact of these on economic growth is likely to be visible only over the medium term.

There also remains an urgent need for further reforms to address structural issues undermining growth and encourage long term savings as well as channel them into productive sectors of the economy. Fiscal consolidation; land/labour reforms and policy changes to tackle inflation are required to lay the foundation for sustainable growth in the economy.

In our view, there is scope to improve the situation by better execution even in the absence of progress on big reforms such as those listed above. Many projects have been held up due to slow clearances and just speeding up the execution can have a big impact on the investment climate and business confidence.

RBI continues to maintain inflation centric monetary policy stance. How do you see this impacting economic growth and subsequently equity markets? Do you see rate cuts in Jan-Mar 2013 quarter, as indicated by the central bank?

While RBI has largely maintained focus on inflation/deficits, the central bank's move to ease liquidity conditions and the 50 bps cut in repo rate has helped borrowing costs ease from highs and provided relief to corporates--three-month CP/CD rates have eased about 225-230 bps since March end levels.

In its last policy review, the RBI has clearly signaled that it will be monitoring the increasing headwinds to growth, and it has indicated a bias towards monetary easing, depending on the progress of the growth-inflation dynamic. If it appears that growth may suffer further, or if inflation were to show signs of easing, the bank is likely to ease benchmark rates in the coming quarters.

However, it is difficult to comment on the timing of the cycle, given the various imponderables. Having said that, we believe the central bank is unlikely to hold policy rates at current levels for long as that could exacerbate the economic slowdown.

This year has not been good for Infosys and Bharti Airtel, which have been among the top holdings in most of the portfolios managed by you. How do you see these stocks shaping up from their current levels?

Broadly, both telecom and IT stocks have been under pressure over the last year. The former primarily due to regulatory uncertainty and competitive pressures and the latter due to slowdown in business spending in target markets. Bharti Airtel and Infosys stocks have been immune to these sector-wide concerns. We however believe that both companies continue to be well-positioned to navigate through the tough times and emerge stronger.

At present we have noticed that in the funds you run, there is a preference for stocks from the banking and pharma sectors. Can you elaborate what you find attractive in these sectors? Also, in the current scenario, which sectors you consider are risky for making investments?

We follow a bottom up approach to investing and hence, the sectoral/industry allocations are more so a residual of the stock selection process.

At the same time, at a broad level, we are positive on the domestic consumption and investment themes and expect financial services sector as a key beneficiary of those trends. Within this space, we have been positive on private banks for a while now, and most of our banking exposure is in this segment.

At this juncture, systemic risks on restructured loans/NPA are largely concentrated in capital-intensive sectors of the economy. At the retail level, we are not seeing the kind of stress that is being witnessed within these segments at the corporate level. Growth in personal income has outpaced growth in consumption/ leverage. Private sector banks’ relatively higher exposure to the retail space therefore has them well-placed vis-à-vis public sector banks. In some private banks, there may be stress on the asset quality front but it is not structural in nature.

Similarly, we are finding opportunities in the healthcare space. Many Indian pharmaceutical companies have over time moved away from the traditional domestic focus and simple generics-led business to invest in new growth segments and move up the value chain. This alongside the ongoing increase in healthcare spending within the country offer companies good opportunities for expansion.

Franklin has usually maintained a bias for quality stocks. In the current scenario, when relatively less quality stocks are available at attractive valuations, would you diverge from your stance and invest in them?

We primarily adopt a bottom-up, fundamental research based approach to investing and invest with a long-term horizon. Any short-term valuation bets would again not be made completely ignoring the basic fundamentals of the business and would be in line with the investment mandate within the fund. Ideally, we would like to achieve top notch performance without any compromise on the quality of our investment decisions.

What strategy would you suggest the investor to adopt at this point of time in the market?

As always, our advice to investors would be to invest in line with one's financial goals and risk appetite rather than focus on market conditions/ fads. It is also recommended that one sticks to the long-term investment plan and not get perturbed by short-term volatility as this is inherent to stock markets. History is replete with examples highlighting the pitfalls of this approach.

Investing through the systematic route and diversifying across asset classes is the best way to deal with market volatility and benefit from it. When evaluating mutual funds, analyze their performance across market cycles and also in terms of style consistency--one should not end up buying a large cap fund and realize it actually has a mid-cap portfolio.

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