Avoid stocks with poor fundamentals: Sivasubramanian KN, Franklin Templeton Mutual Fund

Prospective rate cuts, lower earnings downgrades and project fast-tracking by the government are likely to instill confidence in investors, though worries about deficits and capex slowdown remain, says Sivasubramanian KN, chief investment officer, Franklin Templeton Mutual Fund. Post the 2000-point market rally in January, the fund house has increased exposure to telecom and power firms and financial services institutions.

It has cut investments in technology companies, as per the fund fact sheet. In an interview to ET, Sivasubramanian says investors need to be cautious about the sharp run-up in stocks without underlying fundamentals. Edited excerpts:

Markets have gained 15% and FIIs have pumped in over 11,000 crore since January this year. What do you think is the reason for this turnaround in trend?
Improved economic news flow from key economies such as the US and China as well as policy support have improved global investor sentiment over the past one month. Emerging markets such as India have benefited from the easy global liquidity, as foreign investors seek higher yields and look for medium-to-long-term growth opportunities.

The rally also needs to be seen in the context of India's underperformance in 2011. In an improved risk environment, global investors could have found India attractive, given that most negative developments appear to be priced in. However, we need to be cautious about the sharp run up in stocks without underlying fundamentals.

Do you expect this buoyancy in the market to continue?
It is difficult to predict short-term market movements - a lot would depend on the global situation. While broad issues about twin deficits and slowdown in capex remain, there are some signs of improvement: One, RBI has indicated interest rates have peaked; two, the government seems to be fast-tracking project approvals and three, earnings downgrades momentum has slowed in recent weeks.

What are your major concerns with respect to Indian markets?
The near-term direction will depend on various factors such as inflation, policies and global factors that could impact liquidity. Any spike in risk aversion could impact capital flows into India and if commodity prices, especially energy, start firming up, it would impact India's current account position. Investors are looking for clarity on the fiscal consolidation front. They are also analysing the impact of the recently launched food security bill and SEB losses.

Is it time to move out of defensive sectors?
The focus should be on individual companies and their characteristics and growth potential rather than a top-down view that is fraught with risks. We have a bottom-up approach to investing. We choose companies based on their individual merits.

What will be the impact of Assembly elections on markets?
We don't expect elections to have any significant impact over a longer time-period. However, the results could have an indirect impact; a negative result for the ruling coalition could bring in some uncertainty. On the other hand, a strong showing can help the central government to push forth key reforms.

What do you expect from the budget?
Investors will look for an insight into the government's stand on various reforms, steps towards fiscal consolidation and policy measures to facilitate a recovery in the capex cycle.

Source: http://economictimes.indiatimes.com/opinion/interviews/avoid-stocks-with-poor-fundamentals-sivasubramanian-kn-franklin-templeton-mutual-fund/articleshow/11865606.cms?curpg=2