Indian market has breadth and depth of firms to invest in: Sukumar Rajah

With the Indian equity markets trading at record highs, Sukumar Rajah, senior managing director and director of portfolio management at Franklin Templeton Emerging Markets Equity, tells Puneet Wadhwa in an email interview that the spillover impact of the US Federal Reserve’s (Fed’s) monetary policy stance on emerging markets (EMs) is more limited now when juxtaposed with prior cycles. Edited excerpts:

Should global equity markets be worried as regards global central bank action, especially the Fed, over the next few months?

The monetary policy stance of the Fed will continue to be a factor influencing markets in the short term. However, we believe investors will refocus on fundamentals and earnings trends among individual companies as we approach the end of the monetary policy tightening cycle.

The spillover impact of the Fed’s monetary policy stance on EMs is more limited, compared with prior cycles, as factors other than developed market demand are playing a bigger role.

Inflation in Asia has been less sticky relative to the US, with inflation at or past its peak in countries like the Philippines, India, and Indonesia.

Historical economies of concern, such as Indonesia, have become more resilient in this cycle due to a structural improvement in the current account due to investment in base metal processing for electrical vehicles.

How are you viewing India as an investment destination in the Asian and EM context?

We view India positively as an attractive investment destination in Asia and the EM context due to its strong structural macroeconomic outlook. India is an equity market with a breadth and depth of companies to invest in. On a bottom-up basis, we find a good variety of stock ideas that fit our investment philosophy: sustainable growth at a discount to intrinsic value.

Some experts see big money exiting China and finding its way into Japan, South Korea, and Taiwan instead of India. What’s your view?

Reduced allocations to China are only one of many factors driving fund flows. The long-term direction of fund flows into a market depends on fundamentals, including demographics and potential economic growth, as well as the risk profile of the market. For India, these factors are improving. Additionally, the Indian equity market benefits from the structural shift in domestic savings towards financial assets, such as equities.

How big a risk is a subpar monsoon or El Nino for the Indian market?

A ‘subpar’ monsoon is a risk but unlikely to be inflationary, considering the food stocks available. The contribution of agriculture to the overall gross domestic product (GDP) is modest; other drivers, including manufacturing, are more important from a GDP output perspective.

When do you think investors will get into ‘election mode’ and extrapolate the outcome of state polls to the general elections?

India has entered election mode. Seasoned investors are not extrapolating state outcomes to the general election. Karnataka’s results did not impact market sentiment.

What does your India portfolio look like? What is the total exposure, and what have been the additions/deletions in the past six to 12 months? What is the rationale behind this strategy?

Our biggest overweight by sector is financial, where our top holdings include ICICI Bank and HDFC Bank. This reflects our optimism about the outlook for investment and consumption in the economy, as well as the continued scope for high-quality public sector undertakings to continue to gain share within the banking system.

We also have a significant overweight in the consumer discretionary sector, given our confidence in growing incomes, consumer upgrades, and changes in the lifestyle habits of young consumers. Stocks we hold include Zomato and MakeMyTrip.

Are there any sectors you would like to add as on a correction or wish you had added, say, a year ago?

We would consider adding to our positions in information technology (IT) services on a correction, as we are positive on the longer-term outlook for the industry, driven by the continued trend of digital upgrades. 

Valuations in the industry group are currently elevated, but stable cash flow is an attraction.

How different is your strategy for other markets?

Our Asia strategies tend to have a higher allocation to the technology sector, compared to India. Within our Asia strategies, we are overweight on IT, in large part due to our conviction on the long-term outlook for semiconductors in the memory and logic space. The difference is also partly a reflection of the composition of the respective MSCI Asia and India benchmarks: technology is the largest sector in Asia, and financial is the largest sector in India.

How do you see the 2023–24 earnings layout in the Indian context?

We expect domestic-oriented sectors to be more resilient. Some sectors, like materials, which enjoyed abnormal margins, could see a reset on any change in the outlook for commodity prices.