The Indian equity market is expected to move sideways over the next 6-12 months as the roll forward of earnings is likely to be offset by further valuation correction and some cut to consensus estimates, according to global asset manager Franklin Templeton.
However, it added that the market’s long-term themes such as under-penetration, formalisation and stable government remain intact.
In its recently published ‘Emerging Markets Insights’ report, Franklin Templeton also said the liquidity crisis impacting selected developed market banks has unnerved emerging market (EM) investors, but the risk of contagion to EM banks appears low.
This is due to favorable factors such as higher capital levels and tighter regulation.
“Banks in China, India and Brazil carry between 3-6 percentage points of capital above local Tier 1 capital requirements and hold more capital than the minimum required under Basel III regulations,” it noted.
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Franklin Templeton said it is bullish on leading local banks with strong business models that stand to benefit from the growing penetration of financial products in their respective markets.
“Besides strong bank names, we also favor technology enablers such as semiconductors, IT services, battery and renewable energy-related companies. We believe these companies are benefiting from disruption, digitalization and new energy trends,” it said.
The report added that lower US bond yields could result in a weaker US dollar, which is good news for liquidity in EMs.
However, rising risk aversion among banks and alternative providers of capital could reduce the availability of credit.
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Highlighting the stock market performance across markets, the report said both emerging and developed market equities rose in the first quarter of 2023, despite volatility in March due to the banking turmoil.
For the quarter, the MSCI Emerging Markets Index advanced 4.0%, while the MSCI World Index rose 7.9% (both in US dollar terms).
“Indian stocks were pressured on concerns of a consumption slowdown and potential contagion risks from the liquidity crisis impacting selected developed market banks,” it added.
Regarding other EMs, it said China reached an “inflection point” with the easing of access to credit for the real estate sector in October. This was followed by a significant reset in US-China relations at the G20 meeting in Bali in November. The final catalyst is the dismantling of China’s zero-COVID policies.
For Taiwan, Franklin Templeton’s corporate outlook has turned more negative amid weakness in the semiconductor sector.
The EMs it has a positive outlook on include Mexico, Qatar, Saudi Arabia, UAE, Indonesia and Thailand.
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