ETMarkets Fund Manager Talk: FPI allocation to India may not outpace China, but relative gap will narrow: Venkatesh Sanjeevi, Franklin Templeton

“The market cap of Chinese stocks is $13 trillion vs around $3 trillion for India. So, it is unlikely that India can outpace China in terms of allocations, but the relative gap should keep narrowing in the years to come,” Sanjeevi, vice president and portfolio manager – emerging markets equity, told ETMarkets in an interview.

Edited excerpts:

India was the second best performing market in 2022. Do you see this show repeating in 2023?
The outperformance of India in 2022 has been significant. Nifty 50 has outperformed MSCI EM index by 27% and MSCI World index by 24%. At this point, the absolute valuation levels and the valuation premium for India relative to many other global markets remain quite high.

While the fundamental long-term story of India remains intact, given the valuations currently, it is difficult to anticipate that such a relative outperformance could repeat in 2023.

However, on a medium to long term basis, Indian equities continue to offer one of the most compelling investment opportunities globally.
What are your current cash holdings? Which are the areas you are looking at for an opportunity to deploy them?
Current cash holdings are commensurate with the longer-term trends of around 2-5%. We are in the lookout for opportunities broadly under two segments: a) structural compounding opportunities that are available at reasonable valuations in sectors like financials, IT, consumer sectors and healthcare, b) tactical ideas in select names that can benefit from China reopening.

India has started seeing “dedicated” allocations from FIIs within the emerging marketbasket, rather than being just a part of their EM portfolio. What’s driving this bet and do you see scope for India to outpace China in the coming years?
The Indian market offers certain unique characteristics – high growth, resilient domestic economy, political stability, controlled inflation levels (better than that in many economies), and plenty of high-quality investable companies. The strength of these factors manifested in the significant outperformance of the Indian markets over the past few years.

Given these aspects, global investors could be keen to have a dedicated allocation to India, so that they don’t miss out on an opportunity to participate in the strong growth prospects ahead.

China, on the other hand, is a much larger economy and already a significantly larger component of the EM universe. The market cap of Chinese stocks is $13 trillion vs around $3 trillion for India.

So, it is unlikely that India can outpace China in terms of allocations, but the relative gap should keep narrowing in the years to come.

In 2022, we saw largecap stocks doing better than the broader market which helped us scale record highs. Do you think midcap and smallcap stocks will get their mojo back and could outperform in 2023?
Over the past 2-3 years, we have witnessed a number of events like COVID-19, Russia- Ukraine conflict, runaway inflation and unprecedented policy tightening by the US Federal Reserve. The larger companies are usually better equipped to handle an uncertain macro environment and, hence, display better resilience in terms of their earnings.

However, as the impact of these large events wane off, we would expect the broader economy to do well.

We are already witnessing that in the mid-sized banks and we should gradually see the other sectors participate as well. A broad-based economic growth environment is usually a good time for investing in mid- and small-cap segments.

But do you think the premium that India commands will sustain given that earnings growth is also expected to be better in FY24?
Valuations are on the higher side – both on an absolute basis and relative to other global markets. India deserves to trade at a premium to other markets because of the higher long-term growth outlook. Indian macro is not in a fragile shape and can withstand global shocks. However, we are now looking at China reopening after COVID lockdowns and US inflation beginning to cool off, which could be positive triggers for the respective markets.

Hence, on a relative basis, one can expect the valuation premiums of India to moderate towards longer period averages

Do you think the battered new-age technology sector could get some respite in 2023? Are you seeing any investment avenues in this pack?
We hold a constructive view on the long-term potential of select new-age technology sector stocks which have a strong dynamic business model, wide moat and growth sustainability. Evaluating these stocks, basis traditionally used metrics of performance and profit could be misleading.

We would rather focus on the differentiation and strength of the value proposition offered by the business. We have seen in other economies like China and US that some of these business models can be profitably scaled to a much larger size and, hence, creating “substantial shareholder value.

Why should investors look at investing in Franklin India Bluechip Fund? What does this category provide that other categories don’t?
Large-cap category forms a part of the core allocation for any portfolio. The fund benefits from the consolidation theme whereby the focus is on large established players garnering greater market share from smaller players on account of their size and fire power to augment their growth further.

The largecap category serves as an anchor during market volatilities displaying relative resilience over other equity categories.

Since Bluechip Funds are considered riskier than other category funds like index funds, what is your ideal risk management strategy and how has it been working out for you so far?
Even as we follow a bottom-up approach to stock picking, we attempt to keep sector weights in the portfolio within a specific range of the benchmark weights. Our investment philosophy is guided by factors including quality, growth sustainability of the business along with a long-term investment potential.

Adhering to these factors has allowed us to keep the portfolio turnover historically low versus category. Our proprietary stock selection process facilitates focusing on stable long-term profitability-oriented businesses over highly levered / closely held businesses.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)