Sivasubramanian KN, Chief Investment Officer, Franklin Equity – India, Franklin Templeton Investments believes that companies in banking and financial services have good potential due to their low penetration.
Along with the euro crisis & slowing Indian economy, the depreciation of the Indian rupee is a worry for many. What are the adverse effects of the depreciating rupee on the Indian economy and the equity market?
Sivasubramanian: A mix of increased global risk aversion (capital outflows) along with domestic factors such as widening twin deficits (fiscal and current account) have weighed heavily on the rupee in recent months. Recent measures by RBI to increase capital flows and check speculative activity in forex markets have had a positive impact on the currency, which now trades off lows.
At this stage we do not foresee any major issues for Indian companies with external exposure. However, if the depreciation continues, some of these companies might see their earnings getting impacted due to increased provisions. The sharp decline in the rupee vis-à-vis the US dollar also pushes up the cost of imports and increases the servicing cost of overseas borrowings.
Looking ahead, the near term direction for the rupee will depend to some extent on the global factors and the government’s ability to control deficits. However, if the relatively strong fundamentals are sustained, the rupee is likely to strengthen against the US dollar over the medium to long term.
How do you see the euro crisis panning out? Since we seem to be less resilient than we were in the 2008 crisis, how do you see Indian markets if the euro crisis blows up?
Sivasubramanian: The situation in the Euro zone remains fluid and it is difficult to comment on how it will evolve from here. Hopefully the crisis in Europe will get resolved soon and policy makers in developed countries can refocus their energies on boosting the slow growth.
At this stage, we think India’s external pressures are manageable. India’s high forex reserves, low external debt and low export-to-GDP ratio provide cushion to deal with the ongoing crisis. We also don’t foresee any issues for Indian companies in terms of their external exposure. If the rupee depreciation continues, some of these companies might see their earnings getting impacted due to increased provisions. Corporate India and the Indian economy have already exhibited their resilience during the 2008-09 crisis, when global conditions turned extremely negative.
Some feel that the Indian growth story was always more hype than substance. Do you feel the India growth story is still intact?
Sivasubramanian: Yes. While it is clear that India along with the global economy will face challenging times in the near-term, from a long-term fundamental point of view, India remains relatively well-placed. The underlying economic fundamentals remain intact – demographic dividend, rising income levels, high savings rate and expected increase in infrastructure spending. It is important for the government to put in place the requisite policy framework to address the critical issues facing the economy and thereby ensure sustained long-term growth.
In the year 2011, gold has been a remarkable outperformer. Considering the current market scenario, where do you see gold heading? Do you expect gold to correct further?
Sivasubramanian: Gold is traditionally perceived to be a safe haven in times of severe economic uncertainty/ turbulence in currency markets. We expect the key concerns of 2011 to play out during the first half of the year and financial markets could continue to be volatile in this phase. It is difficult to talk about the direction, given the various imponderables. However, data suggests that performance of gold/ gold-backed securities is likely to be cyclical and the long term returns have tended to be low.
Which sectors are likely to bounce back fast in 2012?
Sivasubramanian: We think investors are better off focusing on longer-term growth stories rather than short-term trends. In our view, sectors that can piggyback on the domestic consumption and investment themes are good opportunities from a medium to long-term perspective. They will take advantage of the structural transition underway in India, with growing income levels and increased infrastructure/capex spending by the government and corporate India. India remains underserved in terms of financial services, but the strong growth in personal incomes has led to increased demand. Given the low penetration of banking and financial services in India, we believe companies in this sector have huge growth potential.
There is a growing belief that sooner or later RBI will start cutting interest rates. If so, how will the rate cuts impact the economy next year?
Sivasubramanian: The medium term policy direction will depend on how various factors pan out – inflation, global liquidity/risk appetite, capital flow trends, 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 longer term solution. Globally, many central banks have now started to focus on boosting liquidity and growth – in India, due to uncertainty about government borrowings, we expect short term rates to fall faster than long term rates.
What do you suggest investors to do considering the current global & domestic economy turmoil? Also at times of such market volatility how should investors build their portfolio?
Sivasubramanian: The advice would typically vary from individual to individual and their investment objectives. But the key principles of building a portfolio would be to focus on long term goals and asset allocation, and not get perturbed by the recent events. Investing through the systematic route and diversifying across asset classes is the best way to deal with market volatility and benefit from it.
Your New Year resolution?
Sivasubramanian: To focus on basics and improve the quality of decisions.
