Sukumar Rajah, managing director and chief investment officer, Asian Equities, Franklin Templeton Investments, tells Priya Kansara Pandya foreign money flows, due to easy-money policies globally, will continue, but the market’s direction will be guided by domestic factors like inflation and the rupee. Edited excerpts:
Indian markets have seen a good 2012 till now. Where are we headed from here on?
A mix of global and domestic factors will influence the market’s direction over the near term. While emerging markets like India are likely to garner good flows due to easy liquidity conditions globally, the focus could increase on domestic factors like domestic policy, impact of news surrounding Iran on crude oil prices, inflation and the rupee weakness, which have impacted the market sentiment negatively.
Crude oil is boiling again, and the rupee is under pressure. What are your forecasts for these two?
Though the supply issues arisen from geopolitical tensions between Iran and Western nations have been ironed out, we expect global energy and commodity prices to remain elevated till the time easy liquidity conditions persist and as economic growth in the US and other key nations picks up thereafter.
The rupee has witnessed a renewed downward pressure in recent weeks, owing to concerns about the widening current account deficit and higher dollar demand from importers. It could continue to be volatile over the short term, tracking trends in foreign institutional investment flows and current account deficit.
With inflationary pressures showing no sign of easing, do you expect a rate cut to happen in 2012-13?
Monetary policy decisions are based on multiple factors, including domestic growth trends and global situation, and inflation is only one of these.
In its last policy review, the Reserve Bank of India had clearly signalled interest rates had peaked and future policy actions would be towards easing. However, the timing and pace or the extent of monetary easing remains uncertain due to sustained strength in core inflation drivers and the fiscal gap.
Is there a possibility of 10-year yields spiking to nine per cent?
The government’s target to bring down fiscal deficit to 5.1 per cent of gross domestic product in 2012-13, from 5.9 per cent at present, is predicated on its ability to rein in subsidy spending and meet non-tax revenue targets (disinvestment and spectrum auction collections).
With oil prices reigning high, downside risks to cutting subsidy spending exist. It’s difficult to predict the level 10-year gilt yields will run up to, but the upward pressure on gilt yields is unlikely to recede soon due to the above factors. Investor scepticism over the government overshooting targets has weighed on the government bond market.
What has been your investment strategy in the last few months?
Our portfolios are typically fully invested and the cash exposure is only to meet liquidity needs and/or due to portfolio restructuring or rebalancing. In terms of sectors, we are bottom-up investors and search for opportunities that can deliver healthy returns over the medium to long term, irrespective of sector or market capitalisation. But broadly, we believe companies based on domestic consumption and investment story are good opportunities from a medium- to long-term perspective.
With fourth-quarter results coming up, do you expect companies to show an improvement or surprise negatively?
The top-line growth may remain firm, especially in consumer-oriented businesses, given the strong underlying private consumption trends. However, companies will continue to face challenges on the margin front, as input and borrowing costs are unlikely to come off in a hurry.
Investors are exiting mutual funds, despite foreign money flows into the markets. What’s your take?
On the equity side, multiple factors, including regulatory impact on pricing and profit booking, have had an impact. However, it’s interesting to note whenever there is correction, net flows typically turn positive. Long-term money has been flowing into hybrid and fixed income segments in recent times.
