India is in the midst of a strong growth cycle. Aided by continued government spending, it's among the fastest-growing large economies and large capital expenditure from the private sector is also expected in the next few years. However, equity market investors may have to lower their returns expectations, in the backdrop of the huge rally markets have already seen, according to a large fund manager.
The continued bull run in equity markets saw the equity benchmark BSE Sensex scale the 80,000 summit on Wednesday. The 30-share index touched an intra-day high of 80,074.30 level, before settling at 79,986.80, up 545 points or 0.7 per cent. The NSE Nifty50 index also rose 0.7 per cent or almost 163 points to close at 24,286.50 level.
The Sensex has surged nearly 23 per cent in the past year. In the same period, the smallcap index has jumped 63 per cent and the midcap index 62 per cent.
Retail investors in India have taken to equity investing in a big way, especially post-COVID. More than Rs 20,000 crore is now coming into the mutual funds industry per month via systematic investment plans (SIP) alone. Foreign portfolio investors, who sold over Rs 25,500 crore in Indian equity in May, were net buyers in June. Overall so far in 2024, FPIs' net investments in equity stand at Rs 1,753 crore, shows NSDL data.
According to Janakiraman R., chief investment officer - emerging markets equity - India, Franklin Templeton, confidence in the India growth story is driving the flows and there are several levers that are going to drive India's growth.
"Government capex has been quite good for a reasonable period of time. Household capex, which is primarily in the form of real estate saw a big recovery post-COVID and it continues. Corporate investment in new assets, new factories, all indications are this will start to grow quite fast," he said.
He feels India is in a sweet spot, with recovery in the investment cycle on the one side and all the macro numbers are looking stable on the other side, whether its inflation or deficit. India is one of the rare large countries that has actually managed to reduce the fiscal deficit post-COVID, he pointed out.
However, over the past three years, equity returns have been higher than earnings growth, suggesting that to some extent markets may have already captured in advance the benefits from this growth.
"Now, to some extent, investors should be prepared for a block of time where equity returns can be less than the earnings growth. Even after that, you will still be making a reasonable return. This is because of the fact that the underlying earnings growth will be quite robust," said Janakiraman.
Looking ahead, the large caps are expected to see earnings growth in the mid-teens, while small and midcaps are expected to grow at a much faster clip. However, small and midcaps also need to correct a bit more in valuations, according to him.
"I still expect respectable equity returns if one takes the next three-year view. Respectable, meaning, it will be good but I don't think you will be able to get the returns that you saw in the last three years, but it will still be better than the other asset classes," noted Janakiraman.
Franklin Templeton is launching a new diversified equity fund in the multi-cap category next week. The fund will maintain a minimum 25 per cent exposure in large, mid and small-cap, in line with regulatory requirements, while the remaining 25 per cent will be invested based on an internal framework.
The small and midcaps have already rallied significantly in the last few years. But, Janakiraman pointed that a lot of the new emerging opportunities like in fintech, engineering research and development, and SaaS (software as a service) are in the small and midcap space. Therefore, a category like multi-cap would offer growth from investments in mid and small-caps and stability of the large caps, he said.
The fund house was hit hard in 2020 when it had to wind up six fixed-income schemes it managed in India amid redemption pressures and liquidity issues in the bond market at a time when the world was in the grip of the COVID-19 pandemic.
In the wake of the crisis, Franklin Templeton saw a sharp drop in assets under management but has slowly regained lost ground. According to Association of Mutual Funds of India (AMFI) data, its average assets under management in the April-June quarter of 2024 stood at Rs 96,700 crore, compared with around Rs 60,000 crore in the June quarter of 2022 and Rs 80,640 crore in the same period in 2020.
The fund house will launch a series of fixed-income funds this year, said Avinash Satwalekar, president, Franklin Templeton-India.
