The market isn’t expensive because we are at the start of a strong earnings cycle, says Sukumar Rajah, Managing Director and Chief Investment Officer for Asian equity at Franklin Templeton.
Having seen quite a few market cycles, what is your sense of the current one? Are we in a secular
Markets will always have cycles. This time too, you can’t assume that the market will only go one way. But we have to appreciate where we are in the bull cycle. Today, we are at a juncture where corporate profit margins are depressed, growth is low and (yet) long-term quality parameters are improving for the economy.
There is a move towards greater openness and transparency on policy. There are greater checks and balances coming in on crony capitalism. These have potential to improve the fundamentals of the economy, the corporate sector and markets. In relation to all these, the price we are paying for stocks isn’t all that expensive. I think we will have strong earnings growth over five to six years. Inflation is under control, the CAD is low. So, the risk perception relating to Indian markets will drop. So, if you look at India in this context, both on an absolute basis and relative to other markets, it looks pretty good. Most other markets are looking weak based on current growth and earnings potential.
Is Nifty price-earnings (PE) of 21 high?
You can’t look at the PE in isolation. It depends on where you are in the earnings cycle. At the peak of a strong earnings cycle even 15 is quite high. But at the beginning of a good earnings cycle even a 25 PE may not be very expensive. PE is a derived concept and you need to look at cash flows.
In which sectors do you see the most potential today?
We still see a lot of opportunity in the financial sector. Given the structural improvements happening, if the economy gets back to 7-8 per cent growth and we have about 4-5 per cent inflation, we can get back to 14-15 per cent nominal GDP growth. The financial sector may grow at a higher rate than nominal GDP because financial savings are a small proportion of savings. So, balance sheet growth of 15 per cent does appear attainable for banks. Good quality banks may grow even faster. We find a lot of opportunities in good quality banks.
What is the foreign investor’s view of India today?
I think the long-term confidence on the sustainability of growth has come back. India always had demographics and other factors in its favour. But for a while, FIIs had begun to question economic stability in India because of very high inflation, the current account deficit and the perception that corruption was at a new high, stalling growth. But there is now a reset to normal levels. Those negatives have waned and India’s positives are starting to shine.
At the same time, the other markets have taken a turn for the worse. In China, the sustainability of growth has come under question, with population aging and labour supply stagnating. Europe too is troubled.
What is the impact of recent oil price falls on companies?
It is positive for oil marketing companies. They have made big investments in their marketing network. Yet, because of the controlled environment their marketing margins were very low. Now they can make more reasonable margins. For upstream companies, gross realisations may fall, but subsidy sharing may also reduce. They may be net gainers from gas prices too. The big thing is that the market can now take a view on these companies based on commodity prices and their output, instead of speculating on subsidy.