MUTUAL FUNDS

Investors should adopt a systematic approach to investing in order to benefit from long term prospects of Indian economy<
02-Feb-15   13:38 Hrs IST

Mr.Anand Radhakrishnan
In an interview with Capital Market, Anand Radhakrishnan, Chief Investment Officer - Franklin Equity, Franklin Templeton Investments - India said, The spectacular run experienced by equity markets in 2014 was mainly driven by 'hopes' of meaningful reforms coupled with some sporadic sparks of recovery as highlighted by improvement in a few macroeconomic indicators.

Excerpts:

  1. What is your view on movements in global markets in CY14?

  2. Global equity markets went through a testing time during the calendar year 2014 (CY14), exhibiting economic recovery in patches. Almost all the emerging equity markets barring India and China lacked strong signals of recovery. While stagflation continued in Brazil and South Africa, declining crude oil prices impacted Russian markets leading to a steep fall in ruble. China was plagued with slowing economic growth prospects. Among developed markets, Europe and Japan continued to battle with deflation, their central banks continued with monetary support to revive economy. However, US economy showed signs of recovery but Fed in its last policy meet emphasized on being 'patient' regarding raising the interest rates.

    The developed markets outperformed their emerging market peers, wherein MSCI AC World index and MSCI EM index returned 2.10% and -4.63% respectively in 2014. China was the top performer for the year as faltering growth (weakening factory gauge) raised hopes of government taking measures to boost the world's second-largest economy. Russian equities were the worst performers as falling crude prices affected the oil exporter nation.

    In commodities market, crude oil prices closed the year with second-biggest annual decline ever due to rise in oil inventories in US (US oil production surged to a three decade high during the year) along with OPEC's stance on maintaining the same level of output despite a surge in global output and falling demand. However, gold prices remained nearly range bound in dollar terms.

  3. What is your take on Indian markets in CY14?

  4. Indian equity markets had a landmark year and ended 2014 with highest gains over last five years. The rally which began on the anticipation of a stable government was boosted by a decisive victory in central elections, resulting in a stable government with focus on economic growth and development. Further, favourable developments on the macroeconomic front such as substantial fall in both CPI and WPI inflation levels and significant fall in current account deficit, coupled with a steep fall in global crude oil prices and large foreign inflows supported the overall market momentum.

    Both interest rate sensitive and cyclical sectors performed during the year. Banking, auto and capital goods sectors were the top performers. Interest rate sensitive sectors viz. banking and auto performed on account of sharp fall in inflation coupled with anticipation of softer interest rates in coming months.  Further, rising optimism regarding economic and investment cycle revival, helped the capital goods sector. 

    Among sectoral indices, almost all the sectors closed the year in green. However, oil and gas, realty and metals turned out to be the worst performing sectors. While bearish global crude oil prices kept the performance of Oil & Gas stocks in check, uncertainty regarding coal block allocation, for which the ordinance route was announced at the end of year and weak macroeconomic data from China weighed on metal stocks. Sluggish home sales numbers and lack of demand for real estate in almost all metro and tier-II cities in the country weighed on real estate stocks. Mid and small cap equity indices significantly outperformed their large cap peers. FIIs flows into Indian equities continued to be robust and aggregated to a net $16.16 bn.

  5. Where do you see the markets moving hereon?  

The spectacular run experienced by equity markets in 2014 was mainly  driven by 'hopes' of meaningful reforms coupled with some sporadic sparks of recovery as highlighted by improvement in a few macroeconomic indicators. While execution of the measures introduced by government may take time to have an effect on the real economy, given a stable political environment the risk of derailment from the economic growth appear to be limited.

Corporate earnings are expected to pick up going ahead and may be led by both topline growth as well as margin expansion. Moreover, one important indicator viz. corporate profitability to gross domestic product (GDP) ratio for BSE 500 companies (ex financials) is currently below the long period average and is expected to improve in line with overall economic growth.

Pick up in discretionary demand and investment cycle taking off will be two important indicators which will provide cues for further movement in equity markets. While discretionary demand has shown signs of improvement, infrastructure may be the stepping stone for revival of the investment cycle. A probable reversal in crude oil prices, weaker global growth prospects and rise in interest rates by US Federal Reserve may add to volatility in the near to medium term. However, given the expectation of decline in domestic interest rates and subsequent beginning of the investment cycle, we believe that gradual recovery in economic growth is likely to continue and translate into stronger earnings growth in the long term.

With re-rating already factored in valuations the headroom for P/E multiple expansions is limited. Hence incremental returns are likely to be led by corporate earnings growth.   At this juncture, while there is general consensus on the recovery, there may be bouts of volatility due to global 'risk off' factors and hence a cautiously optimistic stance is warranted. As a result, investors should adopt a systematic approach to investing in order to benefit from long term prospects of Indian economy. 

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