Amid the ongoing correction on Dalal Street, Business Today sat down with Janakiraman R, Vice President and Portfolio Manager, Emerging Markets Equities-India, Franklin Templeton to understand the factors that could once again help bulls to demonstrate flexibility. Meanwhile, he also shared his take on how investors should view new age companies like Paytm and LatentView Analytics. Edited excerpts:
BT: The benchmark BSE Sensex is still up more than 20% since the start of the year despite a correction of more than 3% in the last week. How do you see the trend evolving?
Janakiraman R: A mix of structurally favorable factors, including continued government spending, an accommodating policy and reform measures announced in the manufacturing, infrastructure, financial and social sectors bode well for the cyclical recovery of the economy. This upcycle cycle can potentially last 3 to 4 years.
In addition, the accelerating pace of vaccination and encouraging aggregate demand has supported market sentiment for the past 20 months or so. On the other hand, soaring prices for raw materials and other resources have squeezed corporate margins and profits.
How far have these been taken into account by the bull markets so far? It appears that valuations have very little room for expansion. The development of the market over the next year will be strongly influenced by earnings growth. Intermediate corrections could provide a better foundation for the long-term market recovery in the future.
BT: What do you think of medium and small stocks? How do you choose quality stocks in a larger space?
Janakiraman R: A phase of cyclical recovery, in particular from a crisis level, is normally quite conducive to the outperformance of mid and small cap categories. The fact that mid and small caps lagged behind the markets until 2019 opened a favorable stage for their strong performance during the market recovery that followed.
After the outperformance of the last 18 months, the valuation of the mid and small cap category seems quite high; both against the trend and against large caps. While the economic recovery will certainly help small and mid caps, this high valuation is likely to weigh on their relative performance.
We look at companies across all capitalization categories in a broadly similar fashion. We are looking for a combination of sustainable quality, growth and acceptable valuation.
BT: What are the two main themes that can offer great opportunities to investors and why?
Janakiraman R: Consolidation of market shares in many industries for the benefit of the largest players in these industries. The increasing formalization of the economy due to the push for regulations like the GST and trends like digital adoption have already helped. The last five-year phase which saw a few crises and lukewarm growth tested the resilience of small players in many sectors.
We are also seeing higher growth in the manufacturing sector. The current geopolitical tension has stimulated interest in sources of supply other than China. Government targeted promotion plans, such as PLI programs, appear to be more effective than previous plans. An increased level of foreign direct investment will also help improve the supply from India. Robust export figures so far this year are a sign in this direction.
BT: What factors can put additional pressure on the markets?
Janakiraman R: Generous liquidity has helped global markets so far since the COVID-19 crisis. If the current phase of higher than expected inflation in the United States continues, the rise in interest rates could occur sooner and at a higher level than expected. This remains a major risk for the markets.
Paradoxically, the strong recovery in many economies has led to a high level of energy demand. As global travel picks up, this will increase this demand. Static supply in such an environment has led to high energy prices. Certain geopolitical issues also worsened the picture. If this high energy price persists longer, it will further exacerbate inflation and also reduce demand levels in many emerging economies.
If a troublesome new variant of COVID-19 emerges, the market will react negatively.
BT: How do you read the results for the 2nd quarter?
Janakiraman R: Improving demand, high cost of raw materials, persistent supply chain disruptions, improving credit quality and strong demand for housing are some of the key lessons to be learned from the results from the second trimester to date.
BT: The entry of new retail investors into the equity markets is unprecedented. What advice would you give to these new entrants who have not experienced a significant decline in the market?
Janakiraman R: Market cycles take their own time to unfold and therefore investing in stocks should always be viewed with a long-term horizon. This helps to avoid intermediate volatilities. To be able to use the power of capitalization, start investing early, invest consistently 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 assessment of risks and goals with a long-term perspective. Maintaining diversified portfolios with exposure to multiple market capitalizations could be considered.
BT: Lately, the recently listed Paytm has eroded over 30% of investor money from the issue price. Today, LatentView Analytics has made an exceptional debut with a gain of over 100%. How do you analyze these new age companies?
Janakiraman R: Beyond the fact that a company is technology-driven, the key input we seek to achieve is the value gap that the company is trying to close. While the company is on a promising path to add value to consumers that goes beyond just digitally activating operations, other factors including visibility of growth, future expansion plans and the proposition to exploit future growth opportunities, among other factors, would be taken into account for further evaluation of this business.
Many of these categories of companies are new and, therefore, offer investors little roadmap to assess the future. In such a case, factors such as robust category growth, strong and growing market share, relatively more evolved business model, agile and dynamic management, etc. offer clues in this difficult endeavor.
