‘The stage is set for a new market cycle’

There’s an overdose of macro data which is making investors ignore good businesses, says Anand Radhakrishnan , Senior Vice-President and Portfolio Manager, Franklin Templeton Investments, in an exclusive chat with Business Line. Excerpts:

Everybody has been waiting for a correction and Fed taper, but markets have just not corrected. So is it right to assume that the worst is behind us?

We never know, but it appears so. We may not like the pace of growth, but remember, corporate earnings are growing by 7-9 per cent annually. The annual average growth over the last four years is around 8.5 per cent for the top 100 companies. Though the pace of growth is slower than in the past, profits are not declining. Hence, while there is bound to be a correction, to expect a largescale one at the index level is wishful thinking. There is no earnings-based story that suggests that there will be a large sell-off.

Beginning August, we have seen a rally in metal and PSU stocks. Historically every new bull market has had a new set of sectors leading it. So do you think we are at the start of a new phase in the market?

The stage seems to be set for a new cycle, if I may say so. Cycles are typically led by extreme events — high inflation, interest rates and very low corporate profit margins. So when the variables are at extremes, you ask the question as to which way the variables will turn and will it be good or bad for the stock market. So look at inflation, interest rates and margins today. Now, can inflation go up from 10 to 12 per cent? Can 10-year gilt yields go up from 9 to 10 per cent? It looks unlikely. I would put the odds on these variables being at an extreme.

I think the situation is changing as we speak. Some of the major policy decisions were postponed for various reasons. The new government that takes over may not be under short-term pressures of facing elections and they may do the right things. A large portion of our problems may be solved by three to four tough policy decisions. If that happens, sentiment may not be that difficult to reverse.

You follow a growth style of investing and the last five years have been very favourable for this strategy. Value stocks have underperformed. Why?

At all points in time, the market usually prefers stocks which deliver growth. Value stocks usually outperform only when there are triggers which unlock value — improving growth rates, M&A, a large one-time dividend pay-out and so on. Unfortunately, despite falling stock prices, this time around, the Indian market did not witness a flurry of buy-backs, corporate M&A or assets changing hands. So value stocks did not have any support and kept falling.

Fearing short-term underperformance, domestic fund managers also tended to stay away from such stocks. This led to higher polarisation in the market, with investors chasing growth stocks to play safe. But when this trend reverses, the guys who have been lucky enough to hold on to value stocks will phenomenally outperform. So you need to have a blended style all the time; have a good mix of growth and value.

During extreme circumstances it may be better to lean towards value stocks than towards growth. Leaning towards growth is the easier decision as you will look good in the shorter term. But it requires some courage and conviction to lean towards value.

Now that two Franklin Templeton funds have a good 20-year record, have you been able to convince people to buy equity funds?

Not everybody has been with us through the 20-year journey. But for the 9,000 people who were with us since day zero, and made almost 53 times the money in Franklin Templeton Bluechip Fund and nearly 30 times in Franklin Templeton Prima Fund, others either came in late or exited early. While we are happy and proud to have such products we are also unhappy that not many investors have utilised this.

From a broader market perspective, despite long-term performance being good, allocation to equities has dwindled. For instance, people are willing put away money in tax-free bonds which have an upside limit on returns, for periods as long as 15 years. With unlimited upside potential, equities may be an equally good vehicle for investors.

Of course, people get distracted by day-to-day events and data on interest rates, inflation and political uncertainty. In the last 20 years we’ve seen the entire gamut of uncertainties: the IPO boom of the nineties, the tech, media and telecom boom and bust, Asian crisis and political instability with governments lasting for just 13 days or 13 months.

We’ve also been through the infra and real estate boom during from 2003 to 2008 culminating in the global financial crisis. Despite these events, there are companies which have continued to grow and deliver healthy profits. While macro analysis is good, it should lead one to right micro decisions. But an overdose of macro data is making people de-sensitised to whatever is happening at the company level.

Generally, if you look at Franklin Templeton funds’ track record, the five-year returns for most funds look good. But one- and three-year returns are middling. What is the reason for this?

We don’t try to put our funds on the top of the rankings. Usually, when the market cycle turns, the top-quartile funds move to the bottom quartile. But if you remain in second quartile on a shorter-term basis, eventually you will move to first quartile on a longer-term basis.

This is one of the reasons why we look good on a five-year basis though we are in the middle of the pack on a one- and three-year basis. Another reason may be that we tend to be circumspect about stocks that move too fast. In our experience, the maximum money has been made in companies that compound steadily and not fast.

You are better off buying a company which grows at an annual rate of 20 per cent for 10 years than a company twhich grows 40 per cent in year one, 10 per cent in year two, and declines 5 per cent in the subsequent year. There are many companies which go through this cycle.

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