Equities are much better priced that any other asset class currently, says Sukumar Rajah, the managing director and chief investment officer of Asian equities at Franklin Templeton. A bottom-up investor will find enough buying opportunities in the current environment will no major global shock likely in the foreseeable future, Sukumar said on BloombergQuint's weekly series, Thank God It's Friday.
According to him, there is no magic wand to create more jobs but deregulation will accelerate the process, he added.
Here are more excerpts from the interview.
How do foreign funds perceive the achievements of the currentgovernment? What are the micro trends in India which are exciting you as anequity investor right now?
I am satisfied with the achievements of the current government. They inherited a very weak economy. There were problems in the financial system. The banking systemhad a lot of bad loans. There were big problems in the infrastructure and telecomsectors. Under the difficult circumstances, they inherited this economyand they have done a good job of stabilising the economy and graduallyimproving the dynamics. A lot has been achieved in terms of some reformsand also many administrative measures that have led to improvement in the coalministry, power ministry and road ministry. The subsidies have been reduced and the fiscal situation has improved considerably. Now the tax compliance is also increasingbecause of GST, demonetisation and other measures. Overall, I am satisfied with what has been achieved in the last three years.
‘No Magic Wand To Create Jobs'
While there is economic growth, there is not enough improvement injob creation. What is your opinion on this, and what does this mean for consumption in India?
There is no magic wand to create a lot of jobs. Because ifthe government creates those jobs than sustainability will be a question mark. The best way to create jobs is by deregulating so that the private sector can invest more. This has been achieved quite a bit in the last three years. A lot more needs to be done and I am sure they have plans to do that.
We have to recognise that there's a lag between some of the initiatives and actual job creation. But I expect gradually much more investment will come into the Indian economy and as those investments come there will be more jobs created.
‘No Major Global Shocks Ahead'
How are you reading global events because inflows seem to betapering off in the last few weeks?
The equity asset class is in a better position compared to many otheralternative asset classes. So, interest rates are going to go up, bonds are going to see a lot of pressure. In last 10 years, the equity allocation ofsavers has been low and a lot of money has gone into bonds. The way equities and bonds are priced, equities give much better value. Secondly, many economies are robust and many companies are seeing good traction in their ability togrow the business and improve their long-term fundamentals.
As a bottom-up investor, we see a lot of opportunities and I am not really worried that there is going to be some event that is going to have a big impact on the portfolios that we manage.
‘Earnings Weakness Temporary'
Have your corporate earnings growth expectations changed forthe financial year 17-18? April-June quarter earnings so far have been on the weaker side owing to GST and the lag effects ofdemonetisation?
This financial year it is very difficult to predict earnings. The last quarter was even more difficult. Trying to extrapolate that doesn't make any sense. I don't think what is going to happen in the next couple of quarters will necessarily have a long-term impact on stock prices. There can be some volatility because of that. The market is mature enough to see through the short-term issues.
Playing The Consumption Theme
Most funds have considerable amount of allocation towards Indian consumption sector.But considering they are at rich valuations right now, how will you play the sector?
We have to look at companies on a case-by-case basis. There aresome companies where the PE ratio is high but the sustainability of growth isgood and they could have improvements in terms of return ratios or margins. And there aresome companies were the PE multiples have expanded without significant improvementin the longer term. So, we have to separate the two.
We have to recognise that there is some sort of a bubble in some sections of the market and our investment process ensures that we stay out of these bubbles.
Pharma Sector: Change In Allocation?
Yourfund has significant investments in the Indian pharmaceutical companies. What is your stance on pharma companies in India and have you changed your allocation since then?
We have some exposure to the pharma sector. I won't say that weare highly exposed there. There have been some negative surprises in terms of pricingand regulatory issues that companies have been facing. So the prices have also corrected. As more data emerges, we have to change our long-termmodels. There has been some reduction in the intrinsic values of many of those companies, but the prices have also reduced. So, to that extent, it has not necessitated too much of portfolio action.
Selective Approach To NBFCs
Significantportion of your portfolio is also invested in private banks in India. Are you trying to play the financial theme in India only via private banks and not via any exposure to non-bankingfinancial companies or any financial services companies?
We do have some exposure to non-banking financial companies butwe cannot paint all of them with a broad brush. Some are in the lending business,some are in the rating business, some are in businesses related to capital marketand the dynamics of each of the companies are different. But we have reasonable exposure there. We are selectiveon quality and sustainability.
Time To Take Money Out?
At a time when we have seen considerable returns from stocks, not enough has been said about capital preservation. What can you tell us about capitalpreservation going forward?
The question is whether the market is overvalued and people should be takingmoney out of the market. Broadly, I don't agree. If we look at the overall market, themarket capitalisation as a percentage of GDP is not significantly higher compared to the long-term average. Going forward, higher proportion of the economy will be represented by the corporate sector. I am not worried about being exposed to the equity market in general. The question is whether there are pockets of overvaluation? Yes, there are pockets of overvaluation. It happens from timeto time. There is very significant overvaluation in some parts of the market, especially insmall caps and some mid caps, where the sustainability of quality and growth is a question mark. People have to stay clear of that.
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