Amid the ongoing correction on Dalal Street, Business Today caught up with Janakiraman R, VP and portfolio manager, emerging markets equity-India, Franklin Templeton to understand the factors which may again help bulls to flex muscles. Meanwhile, he also shared his views on how investors should look at new-age firms like Paytm and LatentView Analytics. Edited excerpts:
BT: Benchmark BSE Sensex is still up over 20 per cent on a year-to-date basis despite over 3 per cent correction during the past one week. How do you see the trend going ahead?
Janakiraman R: A mix of structurally supportive factors including continued spending by the government, easy policy stance along with reform measures announced in the manufacturing, infrastructure, financial and social sectors augur well for the cyclical recovery of the economy. This upcycle can potentially last for 3-4 years.
Additionally, the improved pace of vaccination and encouraging aggregate demand have supported market sentiments over the past 20 months or so. Soaring commodity and other resource prices, on the other hand, have dented corporate margins and profits.
To what extent have these been factored in by the bullish markets so far? It appears that valuations have very little headroom to expand. Market movement over the next year will be heavily influenced by earnings growth. Interim corrections could lend a better footing to the long-term market rally going forward.
BT: What are your views on midcap and small caps? How do you pick quality stocks in the broader space?
Janakiraman R: A cyclical recovery phase, especially from a crisis level, is normally quite conducive for mid and smallcap category to outperform. The fact that mid and smallcaps had lagged the markets up to 2019 set a favourable stage for their strong performance in the subsequent market recovery.
After the outperformance over the past 18 months, the valuation of the mid and smallcap category looks quite high; both against the trend as well as versus large caps. While economic recovery will definitely help mid and smallcaps, this high valuation is likely to weigh down their relative performance.
We look at businesses, across all cap categories, in a largely similar manner. We look for a combination of sustainable quality, growth and acceptable valuation.
BT: Which two big themes can provide big opportunities to investors and why?
Janakiraman R: Consolidation of market shares in many industries to the benefit of the larger players in those industries. Increasing formalisation of the economy due to push from regulations like GST and trends like digital adoption have already helped. The last five-year phase that has seen a few crisis and tepid growth has tested the resilience of the smaller players in many industries.
We also see higher growth in manufacturing. The ongoing geopolitical tension has spurred interest in supply sources other than China. The targeted promotion plans of the government like the PLI schemes appear to be more effective than earlier plans. Increased level of foreign direct investment will also help in improving supply from India. The robust export numbers so far this year is a pointer in this direction.
BT: Which factors can put additional pressure on the markets?
Janakiraman R: Generous liquidity has helped global markets so far since the COVID-19 crisis. Should the ongoing phase of higher than expected inflation in the US continue for longer, the rise in interest rates may happen sooner and to a higher than anticipated extent. This remains a key risk to the markets.
Ironically, the strong recovery in many economies has led to a robust level of energy demand. As global travel resumes, it will add to this demand. A static supply in such an environment has led to high energy prices. Some geopolitical issues have also worsened the picture. If this high energy price continues for longer, it will further aggravate inflation and also reduce the demand levels of many emerging economies.
If a new and troublesome variant of COVID-19 emerges, the market will react negatively.
BT: How do you read the Q2 results?
Janakiraman R: Improving demand, high cost of raw materials, continuing supply chain disruptions, improving credit quality environment and strong housing demand are some of the key takeaways from Q2 results so far.
BT: The entry of new retail investors in the equity markets is unprecedented. What advice would you give to these entrants who have not seen a major fall in the market?
Janakiraman R: Market cycles take their own time to play out and, hence, one must always view equity investing with a long-term horizon. This helps to take the worry off interim volatilities. To be able to utilise the power of compounding, start investing early, invest systematically regardless of market movements and stay invested for the long term. Instead of trying to time the market to find the perfect entry point, we recommend systematic investing based on your risk and goal assessment from the long-term perspective. Sticking to diversified portfolios with exposure to multiple market capitalisations could be considered.
BT: Of late, recently listed Paytm eroded over 30 per cent of investors’ money against the issue price. Today, LatentView Analytics made a bumper debut with a gain of over 100 per cent. How do you analyse these new-age firms?
Janakiraman R: Looking beyond the fact that a business is tech-driven, key input we seek to get is the value gap that the business is trying to fill up. If the business is on a promising path to adding value to consumers that goes over and above simply digital enablement of operations, then other factors including growth visibility, future expansion plans and proposition to tap future growth opportunities, among other factors, would be considered for further evaluation of that business.
Many of these business categories are new and, hence, offer investors little roadmap to gauge the future. In such a case, factors like robust category growth, strong and growing market share, relatively more evolved business model, agile and dynamic management, etc offer clues in this challenging endeavour.
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