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Franklin Templeton is the biggest private sector fund manager of equity assets in India. Here Rajah discusses the outlook for IndiaÆs equity markets, which broke all records this week, with the Sensex briefly passing the 10,000 mark.
Why do you think there was such a bull run in India stocks last year?
Rajah: There were strong foreign portfolio flows because an increasing number of global fund managers became convinced about the long-term potential of the Indian economy and markets. In 2005, foreign portfolio flows amounted to about $10.8 billion û a record for the Indian market.
This coincided with increased domestic flows as risk perceptions change and Indian investors start to allocate a higher amount to equities. The earlier part of the year saw mid cap and small cap stocks outperform their larger counterparts. In the latter half of 2005, blue chips attracted the bulk of the buying.
Overall performance was also fuelled by GDP growth in excess of 8% during the first half of the current fiscal year, with non-farm growth of well over 9.5%. This is reflects the strength in key drivers such as consumption, capex and outsourcing. All these factors led major indices to cross record highs during the year.
WhatÆs your outlook for 2006?
We believe that one year is too short an investment horizon. There are too many imponderables that could affect the direction of the markets. WeÆve also seen a sharp rise in volatility that could continue over the near term. The economy appears to have entered into a high growth trajectory, but the right policy decisions could sustain this growth rate even further.
WhatÆs your longer term outlook?
From a medium to long-term perspective, we continue to be optimistic given strong fundamentals on the economic and corporate front. Economic growth is expected to improve demand for goods and services and this should lead to better profit growth for the corporate sector.
Global investors are positive on emerging markets in general and India in particular given the expected superior growth of these economies vis-a-vis the developed economies over the next few decades. Given the low share of equity investments in the Indian household savings pie, we believe that a gradual shift towards equities will be a positive driver for the markets from a long-term perspective.
What risk factors do you factor into your portfolio management strategy?
Over the short to medium term, there are quite a few risks that could manifest themselves as road block.
Rising energy prices certainly pose a problem for the economy given that India imports most of its oil requirements. However, if they donÆt move up sharply, the growing economy might be able to absorb the costs.
Rising interest rates in developed economies might impact global liquidity and flows into emerging markets. And lastly, political wrangling might slowdown key reforms, which are essential to sustaining the current momentum of economic growth and moving into a higher growth trajectory. Overall, these risks might impact short-term sentiment, but the long-term story continues to be positive.
What type of stocks are you bullish on?
Long-term investors are better off adopting a bottom-up approach and investing in companies with good fundamentals across sectors. We believe there are opportunities across sectors and picking up the right stocks will be more important rather than identifying sectors.
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