RoE to be better than debt in 2012: Franklin Templeton

Excerpts from Bazaar on CNBC-TV18 Watch the full show »

Q: What kind of relative return can one expect in the debt versus equity argument? All of last year there was safety in the bond market rather than the equities. This year how do you think it will play out, given the way yields have been trending?

A: I believe that equity markets have a potential to surprise this year. The outlook is very gloomy and most people have moved away from the equity market. So when things change on the margin direction and we start seeing acceleration in growth, then there can be an appetite for equities. That is when equities can suddenly move up substantially compared to the current depressed levels; but you can never be sure with equities. I would say that there is a good probability that equities would give better return compared to debt this year.

Q: Are you referring to the possibility of a cyclical rally because of the under ownership and the sentiment or the resumption of new trend which pre-empts recovery in economic growth eventually?

A: I think its going to be to a large extent cyclical. At some point when interest rates are cut, the margins improve and some recovery happens in the investment, then the revenue growth trend as well as earnings growth trend can go into higher trajectory compared to what we are seeing at this point of time. There also is under ownership, so when the fundamentals look better, then there will be more appetite for equity.

So it's a combination of cyclical recovery in earnings and revenue growth, and also under ownership of equities correcting. Both these would contribute to some good returns in equities at some point of time, hopefully in the near future.

Q: Is this growth recovery dependent in any way on some improvement in the policy framework or do you think it will happen regardless?

A: Policy framework will definitely help, but even if we don't see any further deterioration in the policy framework, I think there will be some recovery.

Q: Will the structural performance remain the same for sectors this year? Will it still be consumer goods that enjoys leadership and premium valuations, or do you think this cyclical rally can lead to a shift in terms of which sectors lead and which lag?

A: I think the consumer sector might give absolute performance, but when there is a recovery in the economy, they will underperform some of the other sectors. So the winners this time might not be the winners in the last rally. We saw lot of interest in real estate, construction, power utilities and so on, and many of the companies in those sectors are extremely stressed. The framework adopted by the management doesn't seem to be something which can deliver good value to the shareholders for a period of time, so I am not looking at necessarily those types of companies which can be the stars, so there could be selective recovery in some of those stocks.

But there can be good quality metal companies which might be at a low price because of the press valuations and uncertainties. When there is an amount of certainty, there can be recovery in the prices and the companies might see improvement in valuation. Autos and discretionary which have been impacted by growing demand might also see acceleration on sales growth and also some margin recovery.

Q: How important will any relief on the currency be in order to augment equity market performance this year?

A: If you see stability in the currency, then FIIs might look at fresh investment. But if the rupee continues to depreciate, then rupee returns are unlikely to be as high in the bull market we saw in 2004 to 2007. So people will question whether they need to take the risk to come into a market like India.

So at the bare minimum, we would like to see some stability in the currency, which is again a function of how the trade account behaves and also the ability to control deficits etc which will have an impact on the currency.