Focus on individual companies says Sukumar Rajah of Franklin Templeton

Pravin Palande
Updated: Jun 1, 2012 05:48:04 PM UTC

The financial markets generate a lot of number on a per second basis. There are people who have made it a profession to convert this information into trends, buy-sell signals, charts and pivot tables. Over the last 18 years of financial journalism, I have realised that every number has a story to tell. And these numbers as a trend normally never lie. Im forever looking for these trends.

Sukumar Rajah, Director & CIO of Franklin Equity oversees the India products under the Franklin Brand and follows Asia ex Japan as a portfolio manager.  His experience makes him an authority on understanding India and other emerging markets in Asia. He answered our questions about how India is stacked in the emerging market space.

Forbes India (FI): Do you think that the BRIC countries have grown as expected? Or something has surely gone wrong in the last few years where the whole concept of emerging markets and especially BRIC is not working for investors?

SR: We need to keep in mind that BRIC is just a moniker and the underlying theme is something common to most of the bigger emerging markets – faster growth, increase in consumption/investment spending and commodity exports for some. Yes, broadly growth trends have been in line with expectations and the long term BRIC story remains intact. The 2008 financial crisis has obviously resulted in a less conducive global environment and hurt growth in recent years. The impact on growth trends has been much more in case of Brazil and Russia, where economic expansion is more closely linked with commodity prices.

Periods of heightened risk aversion in recent years have also resulted in sharp outflows from EMs including BRICs and have affected equity returns. However, long-term returns continue to be higher than those in developed markets – the 10-years CAGR on MSCI EM and BRIC indices stood at 11.26% and 14.16% respectively as of April 30, 2012. This compares well with 3.49% returns on the MSCI AC World Index and 2.63% returns on the MSCI G7 index.

Notwithstanding the recent slowdown and headwinds on the macro-economic front, the BRICs have a long way to go and should continue to see significant increase in output. Policymakers’ role in steering the economy has however increased significantly and the choices they make to navigate through ongoing tough times will have meaningful impact on growth trajectory. Having said that, we believe the growing belief in a top-down story (bet on a theme/country/sector) has been on the wane and investors are increasingly focusing on individual companies and fundamentals. Hence investors adopting a bottom-up approach in these markets are likely to yield superior risk-adjusted returns over the long-term.

 

FI: Do you think that it is just a matter of time till the BRIC countries  get back on the growth track?

Overall, emerging markets including BRIC economies are expected to maintain their growth lead over developed markets. However the pace of expansion may differ across each of the markets, as these countries are at a different stage in the economic evolution process and varying growth drivers. Due to trade and financing linkages, developed markets will however continue to influence growth trends in EMs. Once the current de-leveraging process plays out and the global macro environment stabilizes, we expect EM countries and BRICs to outperform.

FI: Amongst the BRIC nations, which one do you find the most attractive? Why?

SR: Broadly, we have been positive on China and India that enjoy relatively broader economic drivers. We hold a positive view on India over the medium to long term due to its larger dependence on domestic demand for growth alongside strong economic/ corporate fundamentals. While there some short-term issues, we believe these are outweighed by the longer term positives. Besides, India market valuations also remain reasonable compared to history and negatives appear factored in.

We also like the China growth story. The government has exhibited its ability to steer the economy well in the past and is likely to continue to do so in the future. There are some short-term concerns but domestic consumption has been increasing strongly helped by the rise in disposable incomes - as reflected in the fact that it has become the largest automotive market in the world. From a medium to long-term perspective we believe China presents an attractive investment opportunity.

FI: Which are the new emerging markets? Why?

SR: Apart from the BRICs, we have other countries such as South Africa, Indonesia, Taiwan and Turkey that are doing well. On the other hand, ‘New emerging markets’ or also sometimes called ‘frontier markets’ nations refers to various countries across Asia, Middle East, Africa and Latin America that are exhibiting high growth potential on the back of favourable demographics, expanding middle class, increasing productivity and low levels of public and private debt. These countries include the likes of Mexico, Vietnam, and Nigeria.

FI: What are the policy changes that India should look forward to if it wants to continue to grow at a rate above 8% GDP?

SR: To be able to grow at a rapid pace in a sustainable manner, the government needs to work on three areas: Growth, inflation and fiscal consolidation.

The government needs to put in place a comprehensive framework to de-bottleneck land, labour and capital issues. Adequate support needs to be extended towards development of manufacturing and agriculture sectors, so as to boost productivity and create employment opportunities. Need to bolster agri-infrastructure so as to tackle inflation. Private sector investments in the sector need to be encouraged. Government needs to work towards fiscal consolidation. Reforms need to be aimed at both reducing expenditure and raising revenues.

 

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