Economic growth and corporate earnings set to drive equity returns: Franklin Templeton’s Janakiraman

Earnings growth at Indian companies rebounded in FY24, after a weak show in the year before. Robust economic growth and rising corporate earnings will drive equity returns in future, said R. Janakiraman, chief investment officer–emerging markets equity-India at Franklin Templeton.

In an interview, Janakiraman, who manages assets worth around ₹1 trillion, said he expects earnings growth in the mid-teens in FY25, led by telecom, industrials, materials, and consumer discretionary sectors. He also anticipates small- and mid-cap earnings to outpace large-caps over the next two years. He recommends a staggered investment approach across various diversified fund categories. Edited excerpts:

What is your reading of the Union budget?

The budget reiterates a continued focus on maintaining fiscal discipline along with medium-term growth. The budget priorities further substantiate the emphasis on sustaining medium-term growth through stable capex outlay, thrust on manufacturing and infrastructure. Welfare spending being undertaken focuses on enhancing human capital as a key resource, again a key aspect to support structural growth.

As opposed to the general market expectations of increased spending in social welfare and benefit transfers, the profile of government spending has remained consistent this year. There has been a steady decline in subsidies, slower growth in revenue expenditure and steady capex spending. This shows the intent of the government to maintain fiscal prudence. The dividend received from RBI amounting to 40 basis points (bps) of GDP roughly aided a 20 bps fall in fiscal deficit. Increased thrust on incentivizing new employment in the formal sector will enhance a shift in labour from informal to formal sectors.

Quality of growth estimates remains good. The projected tax growth rate is lower year-on-year, than the levels seen in the previous three years. Tax buoyancy rate is also moderate.

Are the same themes expected to remain prominent even after the budget?

Manufacturing and infrastructure continue to remain key themes that have received emphasis even in the budget. In addition to the ongoing incentivization through the PLI scheme, there is an emphasis on enhancing skilled labour participation in the manufacturing sector as well as support to the MSME sector.

Consumption growth has lagged the capex growth trend over the last few years, led by pandemic disruptions and inflationary conditions. The K-shaped recovery reiterated affluent consumption leading the trend while rural and mass consumption demand lagged. The current budget focuses on measures that could boost demand recovery and general consumption trends.

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The announcements in the agriculture sector are intended at productivity enhancement. With an aim to increase job creation in the formal sector, the new employment-related incentives could boost consumption. Revision in the personal income tax slab under the new regime could further aid consumption at the middle-income levels.

What’s your sense on the path ahead for equities? Is it promising for both domestic and foreign investors, or do you think sentiment has dimmed somewhat after the budget?  

The government’s stance of adhering to the fiscal consolidation path of 4.9% for FY25 (down from 5.1% stated in the interim budget) and 4.5% for FY26 is a strong positive for the markets. This focus on fiscal discipline also sends a strong message to domestic and foreign investors alike on the measures taken to ensure sustainability of growth in the economy.

Tax hikes on STT, capital gains and removal of indexation benefits may have soured the sentiment. However, in comparison with the higher taxation rates in other developed economies, India is still well-placed.

What should investors focus on now?  

While investors may continue to invest as per their specific risk appetite and investment goals, they may seek incremental diversification based on asset class, geographies, investment style and market capitalization segments for their portfolios. It is recommended to consider staggered investment in diversified fund categories.

How have corporate earnings been so far, and what are your expectations for the future?

Earnings growth was robust in FY24 after a weak show in FY23. Lower input costs helped this recovery. A mid-teen growth is expected in FY25. Telecom, industrials, materials, consumer discretionary sectors are likely to lead the growth.

The consensus estimate for Nifty 50 earnings growth stands at 12% for FY25 and 16% for FY26.

What factors could continue driving the market to new highs? Do you see any hurdles to the ongoing rally?

Ongoing robust macro growth and the resultant growth in corporate earnings will be the key drivers that are likely to drive equity returns. Both these are well-placed for the medium term, and investors have taken much confidence from this visibility.

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Risks to the present rally could emanate in the form of geopolitical conflict-led commodity price spikes (food, energy and transport-related) that could hamper the ongoing deflation process and delay monetary policy easing; and a prolonged delay in Chinese economic recovery impeding on domestic demand and impacting global growth. On the domestic front, risks could arise from any unforeseen spike in inflation that could upset expectations of a shallow interest rate cut cycle.

Will mid-caps and small-caps remain the flavour of 2024, or could large-caps take the spotlight?

The small- and mid-cap segments have witnessed robust performance over the past two years. Earnings growth for these segments is expected to surpass large-caps over the next two years. Although valuations are higher than historical averages and relative to large-caps, strong earnings growth could still lead to respectable equity returns. However, equity returns may trail earnings growth. A long-term horizon and higher risk appetite is recommended, while systematically investing in these segments. An investment approach which balances large-caps with small and mid-caps could better manage risk.

How has the traction been in your newly launched Franklin India Multi Cap Fund? Is it a good time to invest in multicap funds at this juncture?

Our recently launched new fund offering – Franklin India Multi Cap Fund received an overwhelming response with a collection of around ₹4,000 crore and over 200,000 applications. The new fund offer saw a participation by over ,7600 distributors across 200+ cities in India. The success of this fund launch underscores the trust and faith that our investors and partners continue to place on Franklin Templeton.

The multicap category provides a holistic exposure to large-, mid- and small-caps at all points in time, thereby making it a well-diversified product for long-term investment. The recent rally in the SMIDs was driven by their higher exposure to cyclical sectors many of which had seen a prolonged lull period for the last few years. This implies that the catch-up was in the offing as the economic tide turned favourable. Besides, the continuing opportunities entering SMIDs in terms of disruptive business models (tech-led disruptors, sunrise sectors from themes like energy transition and Make in India) hold a significant upside potential.

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