Intend to remain invested to fullest extent possible: CIO Janakiraman

Despite higher prevailing valuations, R JANAKIRAMAN, chief investment officer for emerging market (EM) equities-India at Franklin Templeton, believes that healthy earnings forecasts will lead to favourable equity returns. In an email interview with Samie Modak, Janakiraman suggests that while equity returns may trail underlying earnings growth, investors with a risk appetite should persevere with the systematic investing approach. Edited excerpts

There is a lot of debate around the ‘froth’ in the smallcap space. What is your take on this debate?
 

The small and midcap segment has witnessed robust performance over the past two years. Consensus earnings growth (Bloomberg) for the National Stock Exchange Nifty Midcap 150 stands at 19 per cent for 2024-25/FY25 and 24 per cent for 2025-26/FY26 year-on-year (Y-o-Y), while Nifty Smallcap 250 forecasts 24 per cent growth for FY25 and 19 per cent for FY26 Y-o-Y. This growth surpasses that of largecaps, which are projected at 17 per cent for FY25 and 14 per cent for FY26 Y-o-Y.

Moreover, India finds itself in a favourable macroeconomic (macro) environment characterised by improving or stable trends in current account deficit, capital flows, foreign exchange reserves, inflation, fiscal deficit, and the public debt-to-gross domestic product (GDP) ratio.

While these conditions benefit equities overall, smallcap and midcap businesses tend to receive even stronger support.

Are small and midcap valuations above the trend line?
 

Yes, both against their historical valuations and relative to largecaps. However, this needs to be considered alongside the brighter outlook for the small and midcap sectors.

Despite starting with higher valuations, the robust earnings growth is expected to result in respectable equity returns. It’s probable that equity returns may trail behind the underlying earnings growth.

Investors with a long-term horizon and risk appetite may find it beneficial to continue considering systematic investing in these segments.

How does one go about investing in this space?
 

The investment approach followed by Franklin in the small and midcap segment doesn’t deviate much from that used in the largecap category. It focuses on identifying businesses with a blend of sustainable quality and satisfactory growth.

Small and midcap businesses may exhibit higher volatility in operating metrics such as growth, margins, and profitability. However, Franklin’s long-term-oriented investment strategy enables us to absorb such volatility and capitalise on the underlying strength of the business.

The key headwinds...
 

On the global front, concerns about disruptions in the global supply chain are resurfacing. A severe drought has compelled the Panama Canal, one of the busiest trade passages, to restrict daily crossings, potentially impacting the global supply chain.

Factors shaping domestic markets in the near term could include the outcome of the Lok Sabha elections and global and domestic trends in the interest-rate cycle driven by inflation trends and supply chain dynamics.

Any surge in inflation, driven by elevated food prices or global commodity price trends, could raise concerns about the shallow rate-cut path anticipated by the market.

...and tailwinds.
 

Key urban consumption indicators, high-frequency indicators (such as passenger vehicles and air passenger traffic), and those for industrials (including power demand, credit growth, manufacturing Purchasing Managers’ Index, and goods and services tax collection) continue to exhibit robust uptrends.

In addition to consumption demand, other key growth drivers include stable macro indicators, a benign current account situation driven by softer global commodity prices, and sustained traction in industrial and capital expenditure activity in the economy.

Ongoing structural reforms and policy measures undertaken for manufacturing and infrastructure development are expected to provide further impetus to the growth momentum.

How significant is the election risk? Is there a case to increase cash allocations?
 

The broader market anticipates political stability to persist in the economy, which suggests the continuation of existing policy reforms.

Given the recent rally in Indian equities and the consensus earnings projections, we believe that a stable political outcome is already factored into market expectations.

Changes in cash allocations within our portfolios are primarily influenced by market opportunities, and our intention is to remain invested to the fullest extent possible.

Indian markets are among the most expensive in the EM pack. Are investors going overboard with optimism?
 

Indian equities continue to benefit from domestic institutional flows, despite a slowdown in foreign portfolio investor flows during the January–March 2023–24 quarter.

The valuation premium of the Indian market compared to the Morgan Stanley Capital International EM Index has reverted to its long-period average levels.

Investor optimism stems from strong macro parameters supported by policy reforms, contributing to a reasonably strong GDP growth projection for India — the fastest among other larger EMs.

Corporate earnings projections for the Nifty 50 remain at healthy mid-teens, further boosting market sentiment, especially with the potential for political stability.

Which are the key themes or sectors that you expect to do well?
 

We are focused on the cyclical growth theme in our portfolios. Sectors poised to benefit from policy reform measures in infrastructure and manufacturing cover industrial, capital goods, materials, and electric equipment.

Additionally, we are targeting other vital cyclical sectors, such as financial, consumer discretionary, and real estate.

Can you describe your investment style and philosophy?
 

As a fund house, we firmly adhere to a long-term buy-and-hold philosophy, placing significant emphasis on quality and growth.

This approach has consistently delivered returns over extended periods for our funds. The ideal combination of high growth, quality, sustainability of earnings, and reasonable valuations may not always be readily available for stock selection.

For instance, we may consider a long-term high-growth business trading at a higher valuation multiple if the justification lies in its sustainable long-term growth prospects.

Similarly, a good-quality business with sustainable long-term growth trading at cheap valuation levels, albeit without very high growth expectations, may also find a place in our portfolio due to the wider margin of safety it potentially offers.