Investors might move money away from risky assets: Anand Radhakrishnan

The markets have moved up significantly in 2017, amid the flood of domestic liquidity: Radhakrishnan

Earnings could grow somewhere in the mid-teens for the next four quarters, says ANAND RADHAKRISHNAN, chief investment officer (CIO) at Franklin Equity - India, Franklin Templeton Asset (India), in an interview to Ashley Coutinho. However, he says, investors might have to temper their return expectations this year, considering the significant run-up in equities over 2017. Edited excerpts:

What is your equity outlook for 2018?

Some of the macro economic tailwinds of 2016-17 are ebbing. For instance, global crude oil prices have surged, inflation is no longer benign and interest rates are expected to harden. This might put pressure on the government’s fiscal deficit targets. So, overall, from a macro perspective, conditions have become a bit adverse for growth. 

The markets have moved up significantly in 2017, amid the flood of domestic liquidity and in anticipation of an earnings recovery. But, earnings recovery might not be as sharp as expected and domestic liquidity might cool off somewhat. Capital raising by companies by way of initial public offerings, qualified institutional placements and public sector disinvestment touched a record high in 2017, and increasing equity supply will act as a cap on any significant market up-move. So, investors might have to temper their return expectations this year.

Considering the rich valuations, how difficult has stock picking become? 

While aggregate valuations are not out of bounds, the market has been reasonably bipolar. Significant investments have poured into sectors that have shown growth. On the other hand, those that have not delivered have been punished severely and de-rated. Given this scenario, it might be prudent to assess companies that have been de-rated or seem significantly undervalued, rather than chasing growth at high valuations. The fund manager has his task cut out and might need to opt for more contrarian picks to make portfolio valuations look more reasonable. 

What is your view on earnings for the coming quarters? 

The next four quarters are expected to be better than the previous four. The impact of demonetisation and teething problems associated with the goods and services tax will be behind us. The situation in the banking sector is also expected to normalise to a large extent as recapitalisation kicks in. We expect earnings growth to be somewhere in the mid-teens for next four quarters. 

Has the government done enough on reforms? 

The government is spearheading investments in infrastructure, facilitating foreign and private capital to enter. But, I don’t think there is enough momentum at this point. Without adequate infra investment, private capital expenditure is unlikely to revive and earnings growth will remain modest in the coming days. While the government has announced its Bharatmala programme, it has failed to create a conductive environment for gross capital formation. Also, the current capex cycle is driven by government and private sector’s role is minimal. 

The other area the government needs to focus on is rural growth. Measures such as targeted schemes, improving of trade penetration and providing cheaper credit could help nurse the rural economy back in health.

What are the global cues to watch? 

Globally, growth is improving in the US and Europe, and many parts of Asia. This is leading to inflationary pressures and interest rates hardening across major markets. What's more, central banks are shrinking their balance sheets and this could lead to a tightening of liquidity in the coming months, and re-allocation of money away from risky assets. Second, the surge in commodity prices would mean that commodity producing markets might clock higher growth rates than commodity consuming ones such as India and China. 

Which sectors are you betting on?

Those ignored or unloved — including infra, capital goods, industrials and, to some extent, cement, pharmaceuticals and information technology — might offer reasonable value. Although their businesses remain healthy, core growth sectors such as private sector banks, consumer staples and durables, and automobiles, are trading at rich valuations and do not look attractive at this point.

Will domestic flows continue in 2018?

Systematic Investment Plans might continue to chug along at a healthy pace. Lump sum investments – especially money that has come in through the banking channel as a result of demonetisation – might cool off in the next six months. Investors should be prepared for a more volatile 2018, as markets are unlikely to be unidirectional as in the previous year. We suggest staggered investments, to benefit from intermittent volatility.