Sustaining growth momentum of essence in Budget 2022: Franklin Templeton's Radhakrishnan

With all eyes on Budget 2022, Anand Radhakrishnan, Managing Director & Chief Investment Officer — Emerging Markets Equity — India, Franklin Templeton believes that sustaining growth momentum and addressing the weak consumption trend would be crucial factors that the government might need to address urgently.

“Sustaining growth momentum will be of essence for the government while trying to balance the fiscal situation in the budget. Thrust to investment-driven growth has been emphasised through measures like corporate tax rationalisation and supportive schemes including EODB and PLI. Further measures would be needed to sustain growth in capex across segments including private sector and household capex, especially in the real estate sector and affordable housing sector,” he said.

Radhakrishnan added that “Addressing the household capex growth could have significant multiplier effect on the economy. Another area of concern is the weak consumption trend in both urban and rural segments. As a key step to resurrect consumption, stimulus measures will need to be announced. This could be achieved through rebates to taxpayers, concessions for discretionary spends, reforms in agri-sector and measures to improve farm income sustainably among other steps”.

There is some nervousness ahead of the Budget, yet several participants remain positive about the market edging higher. Financialisation of savings has led to highest flows into mutual funds by domestic investors in 2021, Radhakrishnan pointed out.

“Gradual inclination towards disciplined investing is emphasised by the fact that monthly SIP flows have grown in the past year and risen to an all-time high of Rs 11,000 crore (51 percent YoY). There is a 40 percent (YoY) rise in number of SIPs added during the year 2021 to a record level of 4.78 crore and the highlight being an increase in average ticket size of SIP” he said.

This rising SIP trend is reflective of long term orientation of retail investors and disciplined investment view that investors are now beginning to shift away from one-off or unstructured lump-sum investing.

One cannot deny that the run up in the market over the last year and a half has also encouraged investors to devote money for SIPs. “That said, the interim market volatilities could less likely have a significant impact on retail flows coming via SIP route,” the market veteran highlighted.

“Our portfolios adopt a bottom-up stock picking approach with valuation levels and growth sustainability factors playing important role in the investment decisions. While this approach to core portfolio building remains the same regardless of market cycles, valuation driven portfolio actions are taken opportunistically,” Radhakrishnan said.

He added that relatively cheaper valuation in select sectors including consumer businesses and utilities has opened opportunities in these sectors whereas expensive valuation has led Franklin Templeton to trim positions in select sectors including technology and materials. Investment opportunities in the form of new age technology-based companies are also being considered in select portfolios, he pointed out.

Broader data suggests that economic recovery is gaining strength, though the speed of recovery varies within each sector. While manufacturing was early to bounce back, services sector is now playing catch up. Consumption growth remains patchy, especially in the rural sector. Improving asset quality of banks and better NPA management is empowering banks with their lending activities and a potential pick up in private capex should aid credit growth. Private sector capex could fuel the next round of economic growth. Support from structural reform measures is building a conducive backdrop for long term sustainable growth momentum for the economy.

Improving domestic and global demand recovery, better capacity utilisation and factors to facilitate ease of doing business including policies, interest rates, lending capacity of financial institutions could foster a productive private sector capex upcycle. Surveys indicate that corporates are keen to invest and are providing for budgets for capacity expansion. This together with government spending as well as a boost to household capex growth led by improving demand and low interest rates could usher a well-balanced capex growth trend, something that has not happened in the previous growth cycles. Positive multiplier effect of capex ratios could lead to all-round productivity growth through increased employment opportunities, income growth leading to consumption recovery — a virtuous growth cycle.

Speaking of risks, threat from virus variants could present near term shocks to recovery, said Radhakrishnan. Spill-over effect of global commodity inflation trends on domestic economy could potentially impinge on the growth recovery. An eventual tightening of accommodative monetary policy stance by global central banks could weigh on flows to emerging market. Meanwhile, consumer confidence remains at multi-year lows versus pre-covid period. This could be tackled with some stimulus push by the government, he added.

Domestic cyclical businesses hold scope for sustaining growth momentum as the economy continues on the path to recovery. He is reasonably constructive on lending financials given the great combination of structural tailwinds of financialisation, premiumisation and formalisation combined with a cyclical turnaround for the sector — both from a growth as well as asset quality perspective. Within discretionary sectors, bigger companies in the organised space have gained market share during the pandemic and have consolidated their market presence and are well poised to benefit from the growth from FY23 onwards. Key sub-segments include automobiles, textiles, internet & direct marketing retail, specialty retail. He has also maintained a positive stance on industrials including construction and engineering, aerospace and defense, construction materials and telecom sectors.

(1) Follow your own investment style, but keep refining it; (2) Markets are like voting machine in the short run but weighing machine in the long run; and (3) Leave some money on the table meaning do not wait to catch the top to sell.