Dynamics of Indian economy differ from those of others: Anand Radhakrishnan, Franklin Templeton
How are you viewing the recent market rebound?
After the largest ever FPI sell-off from Indian market during 2022 ($29 billion or `2 trillion), if anything could bring back the FPIs, it would have to be either an improvement in global risk sentiments or relative valuation attractiveness of the Indian market. Expectation that growing concerns of global recession would urge global central banks to moderate their rate actions has triggered the global risk-on sentiments. However, the primary factors that prompted the FPI sell-off persist—tighter global liquidity, high inflationary conditions and high interest rates. Amid these developments, we continue to follow our policy of targeting growth at reasonable price for our portfolios.
How real are chances of a global recession? Can India remain out of its clutches?
Falling household purchasing power in the US, imposition of further lockdowns and real estate crisis in China, disruptions in the European economy resulting from the Russia-Ukraine war, continued disruption in global supply chain and rise in global inflation led by commodity and food price rise are some of the key factors contributing to heightened downside risks to global growth projection. A growth moderation is expected over the coming quarters led by slower trade growth, tighter financial conditions and changes in commodity prices. Global growth is projected at 3.2% for 2022 (down 40bps from April IMF forecast) and 2.9% in 2023 (down 70bps from April IMF forecast).
The IMF forecasts growth for key economies to bottom out by 2023. This period could potentially increase the risk of global recession, especially due to a fall in household savings which could increase the vulnerability of economies to even small shocks. The downside risks will be greater for the highly levered economies. Global slowdown or recession should impact India’s merchandise exports, technology sector exports, remittances from NRIs, FDI, portfolio flows and overall balance of payments. Even as the global growth moderation concerns are likely to have a spillover effect on domestic economic growth, the dynamics of Indian economy differ from those of other developed economies. Relatively lower leverage and transitory inflationary conditions are two key factors that could potentially improve the resilience of the Indian economy. This reflects in the lower relative downgrade for India versus others.
What are your expectations around rate hikes and infl ation going forward?
Inflation levels continue to trend high both globally as well as in India. Inflation in India may well be more transitory than is being anticipated, especially arising out of supply side imbalances. To tackle this, the RBI has been taking calibrated policy actions so as to not sacrifice growth. Rate hikes in India are to be viewed as interim measures to cool down the imported inflation. Focus will be on tightening of liquidity over the next few quarters. Going forward we expect further rate hikes by RBI and a terminal policy rate of 6-6.25% by end 2022-23. The pace of policy tightening by global central banks could potentially moderate going forward.
Sectors or themes attractive now?
The sector rotation over the past 2-3 years has been rapid. We prefer to focus on broad and durable themes that could do well over the medium to long term.
(i) Domestic cyclical growth orientation: Gradual economic growth recovery to be led by domestic cyclicals which are the initial sectors to benefit from cyclical uptick. Banks, construction, industrials, materials, discretionary could be key beneficiaries.
(ii) Consolidation and shift of market share from unlisted players to listed ones: This trend has been unfolding over the past few years. Key large players in many sectors have grown faster than respective industry averages. Increasing formalisation of the economy and societal trends like digital adoption have helped this trend.
(iii) Higher growth in manufacturing: The targeted promotion plans of the government appear to be more effective than earlier ones. Increased FDI will help in improving India’s participation in global supply chain.
FT equity funds have got a lift from the shift towards value. How are the funds placed to deliver sustainable outcomes?
Skewed valuations seen earlier in select cyclical sectors is now normalising and markets presently favour value-oriented stocks. A blend of growth and value stocks or valueheavy stocks have done better than pure growth funds in the recent past. FT equity portfolios largely follow a blend of growth and value styles with a tilt towards growth orientation preferred over defensive sectors. Given the current developments as well as futuristically to participate in cyclical upturns of the economy, our portfolios are well positioned in terms of being style-balanced and sectorally diversified. This combination tends to do well during market upheavals.
Why is FT joining the BAF bandwagon?
Balanced Advantage Funds are all-season products and work well during volatility. The fund becomes eligible for equity taxation if the allocation to equity is above 65% for the year. The launch of BAF will enable us to offer a range of hybrid products suite to cater to varied risk profiles of investors.
Given the importance of the BAF model to outcomes, what pillars will it rest on?
For a dynamic asset allocation model to deliver, a healthy mix of qualitative to quantitative factors should form a part of the asset allocation framework. Quantitative factors provide the basis to gauge valuation. Combining this with forward-looking views through various qualitative parameters will make for a holistic approach. The model for Franklin India Balanced Advantage Fund will use such a combination. This will include PE ratio and PBV ratio of the Nifty 500 Index along with an overlay of qualitative assessment of various factors such as macroeconomic trends, policy backdrop, aggregate corporate fundamentals and market liquidity models, among others.