KN Sivasubramanian is chief investment officer (CIO), Franklin Equity-India, Franklin Templeton Investments , which manages assets of over Rs 38,000 crore in India besides acting as advisor to offshore funds managing around $2 billion of equity assets. In an interview with ET , he says that there is increased confidence in the Indian economy and global investors will continue to buy selectively at these levels even if the liquidity situation changes. Excerpts:
How do you see the second round of quantitative easing affecting emerging markets like India?
Despite the recent correction, most stocks are trading marginally higher than the fair value based on the long-term averages. Most of the excess global liquidity is finding its way into emerging markets. However, future direction of the market will depend on earnings growth. In India , for long-term and overseas investors, there is increased confidence about the economy and we feel that global investors will continue to buy selectively.
What could reverse the trend in inflows?
Given that a lot of the rally is dependent on global liquidity and risk appetite, any weakening of global sentiment will impact inflows. Having said that, this would only be a temporary phenomenon and longterm inflows will continue to track the strong fundamentals. There is a dichotomy among foreign and domestic investors, of late. While foreign investors have continued to invest in the Indian market, domestic investors, including retail, have either been selling or sitting on the sidelines.
Do you think the market was running ahead of valuations, after seeing the second-quarter earnings?
The second-quarter results were along the expected lines. While some sectors, like cement and commodities, disappointed, consumption-related sectors continued to report good results. Also, the banking sector, which is a barometer of the economy, beat expectations. We have seen some impact on the margins of some companies due to a rise in input costs, like labour, raw material, among others. The impact of this hike in the input costs will be passed on to the end-user only with a lag effect. Markets, like India, are likely to enjoy valuation premiums due to the long-term growth potential, with the economy being driven by domestic demand.
In a market that has started factoring in growth numbers of FY13, how do you identify value?
We follow a bottom-up approach and focus on stock-picking . The investment style is a mix of growth and value. Our investment focus is on long-term wealth creation and we ignore short-term momentum stories.
Are you making any key changes to your portfolio allocations? Which are the sectors you are overweight and underweight on?
Our overall investment strategy has remained the same, with the broad themes being domestic consumption and investment — infra-structure spending and increasing capex. This is reflected in our top exposures — capital goods and financial sectors. We continue to remain overweight on materials, steel or nonferrous and some cement stocks. In the consumption space, we like telecom companies since we feel that current valuations are discounting all the negatives. While the pharma sector has been doing well, there are selective mid-cap stocks that are attractively valued. In the financial services space, we have exposure to broking companies and are positive on private banks.
What about the real estate sector?
We have very little exposure to this sector due to a lack of transparency. We like some South-based real estate players because of the revival in the demand from the IT/ITeS sector, which is expected to have a positive impact. But overall, we still feel that the sector doesn’t offer compelling valuations.
How do you think interest rates will move?
While the central bank has indicated a short-term pause, a lot will depend on how various factors pan out — inflation, global liquidity or risk appetite, capital flows, fiscal deficit and global commodity prices. Given that the trends in food inflation are being increasingly driven by structural factors, the government needs to address the bottlenecks for a long-term solution. The central bank is sensitive to the fact that the interest-rate environment shouldn’t derail economic growth trends.
How are AMCs coping with recent regulatory changes?
The asset management industry has witnessed margin pressures not only in India, but also globally due to the financial crisis and various regulatory actions since then. The fund houses and the distribution community are trying to adapt to the new dynamics. We think that long-term opportunity in any financial services business including the asset management business remains robust in the coming years in India due to the high savings rate and growing disposable incomes. India continues to be underserved in terms of financial services, given the low penetration of banking and financial services.
Source: http://economictimes.indiatimes.com/opinion/interviews/Foreign-investors-will-continue-to-buy-Franklin-Templeton/articleshow/6967219.cms?curpg=2
How do you see the second round of quantitative easing affecting emerging markets like India?
Despite the recent correction, most stocks are trading marginally higher than the fair value based on the long-term averages. Most of the excess global liquidity is finding its way into emerging markets. However, future direction of the market will depend on earnings growth. In India , for long-term and overseas investors, there is increased confidence about the economy and we feel that global investors will continue to buy selectively.
What could reverse the trend in inflows?
Given that a lot of the rally is dependent on global liquidity and risk appetite, any weakening of global sentiment will impact inflows. Having said that, this would only be a temporary phenomenon and longterm inflows will continue to track the strong fundamentals. There is a dichotomy among foreign and domestic investors, of late. While foreign investors have continued to invest in the Indian market, domestic investors, including retail, have either been selling or sitting on the sidelines.
Do you think the market was running ahead of valuations, after seeing the second-quarter earnings?
The second-quarter results were along the expected lines. While some sectors, like cement and commodities, disappointed, consumption-related sectors continued to report good results. Also, the banking sector, which is a barometer of the economy, beat expectations. We have seen some impact on the margins of some companies due to a rise in input costs, like labour, raw material, among others. The impact of this hike in the input costs will be passed on to the end-user only with a lag effect. Markets, like India, are likely to enjoy valuation premiums due to the long-term growth potential, with the economy being driven by domestic demand.
In a market that has started factoring in growth numbers of FY13, how do you identify value?
We follow a bottom-up approach and focus on stock-picking . The investment style is a mix of growth and value. Our investment focus is on long-term wealth creation and we ignore short-term momentum stories.
Are you making any key changes to your portfolio allocations? Which are the sectors you are overweight and underweight on?
Our overall investment strategy has remained the same, with the broad themes being domestic consumption and investment — infra-structure spending and increasing capex. This is reflected in our top exposures — capital goods and financial sectors. We continue to remain overweight on materials, steel or nonferrous and some cement stocks. In the consumption space, we like telecom companies since we feel that current valuations are discounting all the negatives. While the pharma sector has been doing well, there are selective mid-cap stocks that are attractively valued. In the financial services space, we have exposure to broking companies and are positive on private banks.
What about the real estate sector?
We have very little exposure to this sector due to a lack of transparency. We like some South-based real estate players because of the revival in the demand from the IT/ITeS sector, which is expected to have a positive impact. But overall, we still feel that the sector doesn’t offer compelling valuations.
How do you think interest rates will move?
While the central bank has indicated a short-term pause, a lot will depend on how various factors pan out — inflation, global liquidity or risk appetite, capital flows, fiscal deficit and global commodity prices. Given that the trends in food inflation are being increasingly driven by structural factors, the government needs to address the bottlenecks for a long-term solution. The central bank is sensitive to the fact that the interest-rate environment shouldn’t derail economic growth trends.
How are AMCs coping with recent regulatory changes?
The asset management industry has witnessed margin pressures not only in India, but also globally due to the financial crisis and various regulatory actions since then. The fund houses and the distribution community are trying to adapt to the new dynamics. We think that long-term opportunity in any financial services business including the asset management business remains robust in the coming years in India due to the high savings rate and growing disposable incomes. India continues to be underserved in terms of financial services, given the low penetration of banking and financial services.
Source: http://economictimes.indiatimes.com/opinion/interviews/Foreign-investors-will-continue-to-buy-Franklin-Templeton/articleshow/6967219.cms?curpg=2
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