Earnings Growth Under Pressure but Not for Long

Many investors are wondering about the recent dip in corporate earnings coinciding with relatively high valuations, particularly within mid- and small-cap sectors. Shyamsunder explained that the Q2FY25 earnings season has seen a notable decline, with revenue and earnings growth squeezed across multiple sectors. This slump is reflected in the country's GDP growth of 5.4%, marking the slowest rate in seven quarters. The factors contributing to this slow down include slowing consumption, reduced capital expenditure, and declining exports. It's worth noting that companies reliant on government spending have faced difficulties, especially when central government capital expenditure fell sharply compared to the impressive 43% growth observed in the first half of FY24. Shyamsunder emphasized that these trends are temporary—largely influenced by the adverse effects of elections and the transition period for government formation.

Rural Demand Set to Recover

While urban demand has remained sluggish, signs of recovery in rural demand are becoming apparent. Government outlays for programs like the Public Distribution System (PDS) and initiatives concerning rural development and agriculture have seen a year-on-year increase of 30%. This anticipated resurgence in capital expenditure in the second half is expected to positively influence companies involved in rural services and infrastructure, placing a renewed focus on India's long-term capital expenditure cycle.

Private Capital Expenditure on the Upturn

Referring to challenges faced by private capital spending recently, Shyamsunder expressed optimism for the upcoming years. The cash capital expenditure of BSE 500 companies has grown by an impressive 20% annually during FY23 and FY24. Although this growth is currently overshadowed by increased central government expenditure, improved economic activities and higher capacity utilization are set to push private investments, especially in emerging sectors like electronics, semiconductors, electric vehicles, and renewable energy.

Franklin Templeton's Market Strategy

When it comes to how Franklin Templeton is navigating the market, Shyamsunder indicated a strategic, bottom-up approach to stock selection. Unlike the U.S. market, where growth is heavily concentrated in a select few stocks, India showcases a broader base of corporate earnings growth. The firm remains particularly positive about the banking sector, noting its favorable growth-to-valuation dynamics. Meanwhile, in IT, they are shifting from an underweight to a neutral stance, keeping an eye on market conditions for advantageous entry points.

Monetary Policy Landscape and Global Influences

With the recent appointment of a new RBI governor, the intricate balance between price stability and economic growth is under scrutiny. While there is pressure from rising food inflation, the RBI's current stance seems conservative, as they monitor macroeconomic indicators before implementing any pivotal adjustments. Additionally, the U.S. Federal Reserve’s cautious monetary policy, amidst robust economic growth and persistent inflation, could impact India’s financial landscape. Shyamsunder explained that while India’s trade deficit is expanding, the rupee has depreciated at a slower rate in recent years, supported by strong service exports and stable remittance inflows.

China’s Economic Policies: A Game Changer?

In light of recent developments, concerns arise about the possibility of an economic stimulus in China prompting foreign capital outflows from India. However, Shyamsunder believes that despite China’s potential temporary allure, India's long-term growth story remains intact due to its evolving corporate sector and improving fundamentals.

Diversifying Investment: Fixed Income, Real Estate, and Gold

Looking forward, Shyamsunder advocates for a multi-asset investment approach. Fixed-income investments offer a buffer against market volatility, while India’s real estate market is expected to thrive, driven by low inventory and potentially lower interest rates. Gold, while a smaller portfolio component, serves as a protective measure against economic uncertainties.

Conclusion