SENSEX NIFTY
Apr 26, 2012, 12.34 PM IST | Source: CNBC-TV18

Positive surprise may trigger bull mkt: Franklin Templeton

R Sukumar, managing director and chief investment officer-Franklin Asian Equities, Franklin Templeton Investments says, there is a clear possibility of upside as bull markets are built on pessimism.

R Sukumar, MD & CIO, Franklin Asian Equities

The Indian economy has had negative newflows both on domestic and international front. However, experts believe that the negative news has been digested by the market.

In an interview to CNBC-TV18, R Sukumar, managing director and chief investment officer-Franklin Asian Equities, Franklin Templeton Investments says, most of the negative newsflow has been factored in by markets.

According to him, there is a clear possibility of upside as bull markets are built on pessimism. “The pessimism is pretty high. Expectations of most of the people on economic parameters as well as corporate earnings growth are pretty low. So, any positive surprise could be a very good trigger for a bull market,” he asserts.

However, he says, rupee, stagnant interest rates remain overhangs. “If the interest rate shoots up too much or if there is going to be worse than expected depreciation of the rupee then these could be some of the risk,” he adds. 

He expects rate cuts by RBI to be lower than market expectation. But he sees some improvement in cyclical factors going forward.

Also read: India growth story still on, says Motilal Oswal

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.

Q: A lot of newsflow has happened, are you still okay with the market or do you think there is a downside possibility?

A: There has been a newsflow. But I wouldn’t say there are any big surprises except maybe worse than expected uncertainty created by tax related issues. But other than that, there aren’t big negative surprises.

We all knew that there was deterioration in the fiscal situation. There was a slowdown in the growth rate etc. So, part of it is structural, part of it is cyclical. The market had digested most of the things.

Now, incrementally there are going to be some improvements, essentially cyclical improvements. I think the investment rates might recover a bit in some sectors as companies invest to increase capacities etc and also in certain infrastructure sectors because of some of the recent initiatives. There might be progress in some of the projects. So, that would be the positive.

On a negative side, if the interest rate shoots up too much or if there is going to be worse than expected depreciation of the rupee then these could be some of the risks. I still think the chance of these things happening is not very high at this point of time. But clearly the country needs to tighten its belt. If there is some reasonable progress, then I think that this would abate.

Q: There was some nervousness around the S&P rating outlook change yesterday. How much of a probability would you say there is that there is an actual downgrade coming? How might that impact flows because the fear is that come a downgrade, mandatorily some funds may have to pull out from the market like India?

A: They have stated that the chances of downgrade is something like 33% or so. I don’t want to second-guess what they are saying. But I think what is more important for us is to analyse what the implication of the downgrade would be, whether the interest rates are going to go up very significantly, whether the rupee could hit 58-60.

My view is that chances of something extreme happening in terms of borrowing costs or depreciation of the rupee are still low. I think probably less than 10% that we would see very significant deterioration in any of these parameters. So, we cannot wish away the risk, but at the same time I think we shouldn’t panic either because the probability of something wrong happening is still low.

Q: Do you see meaningful upsides to this market, given the fact that in April FII flows have also slowed down quite considerably because of the general anti-avoidance rule (GAAR) confusion and the way the currency has moved? Do you expect the market to rediscover the momentum that we saw in January and February?

A: I think it is a clear possibility. Bull markets are built on pessimism. The pessimism is pretty high at this point of time. The expectations of most people on economic parameters as well as corporate earnings growth and sales growth are pretty low. So, any positive surprises could be a very good trigger for bull market.

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