January 1, 2008

Investors should moderate their expectations from equity market in 2008

Sukumar Rajah

2007 was another strong year for the Indian equity markets as continued economic and earnings momentum, attracted both foreign and domestic investors. While interest-rate sensitive and export-oriented sectors witnessed a slowdown, the year saw the clear emergence of domestic drivers - consumption and investment. We expect rising income levels and increased infrastructure spending and capex to sustain these drivers. For the stock markets, global liquidity and risk premiums will be key and the economy will be facing the threat of imported inflation due to high oil and commodity prices. However, given that the Indian economy is driven primarily by domestic consumption, the economy is well placed compared to other emerging markets.
 
We continue to be optimistic about the medium to long term fundamentals and believe that investors can continue to benefit from the high growth rates of the economy, if the next generation reforms and infrastructure development are taken care of. There could be some short term volatility if earnings growth does not match up to expectations. Going forward the possibility of earnings surprises on the upside is remote and the growth is likely to moderate to a sustainable 15-20%. We expect flows from domestic investors, especially insurance firms to provide support to the markets.

New avenues
With the regulators keen on rising overseas investment limits and introducing institutional short selling, investors could look at diversifying their portfolio across countries and alternative investments. Having said that, systematic investing continues to offer investors an easy as well as effective way to participate in equity markets, as it tends to reduce the impact of volatility on investments. Investors should moderate their expectations from equity markets, given the growing global uncertainty.

Sectors
We believe long-term investors are better off adopting a bottom-up approach and invest in companies with good fundamentals across market cap ranges and sectors. Since our investment strategy is focused on bottom-up stock selection, we usually do not make our portfolio choices based on our outlook for specific sectors. However, we believe that sectors that can piggyback on the domestic consumption theme such as retail banking, consumer goods and automobiles; trends in domestic infrastructure spending such as construction and capital goods may offer investment opportunities for long term investors.

Global uncertainty
Indian economy remains primarily domestic driven with the export-to-GDP ratio amongst the lowest compared to many emerging markets. In that sense, the economy is well positioned to withstand any global upheavals. However, sharp rise in risk aversion in global markets would result in FII flows moderating over the near term. Long term global investors will continue to find India attractive and as mentioned above, we should see support from domestic investors improving.

The author is CIO (Equity), Franklin Templeton Investments, India. The views expressed here are his own.

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