The Indian stock market is in correction
India: Up to 15 percent per year in the long term
"No. We did not expect such a strong and rapid correction for the Indian stock market either. This development was accelerated by the intensive trading and shorting of single stock futures by a number of market participants, ”says Sukumar Rajah, who is Franklin Templeton's Chief Investment Officer responsible for Indian stocks and the price correction on the Indian stock exchange within the past week commented on e-fundresearch in Vienna.
All India funds affected
This puts him in line with many other India experts who recently took a very critical view of the extremely good performance figures of the Indian stock exchange in recent years (see also e-fundresearch.com article from May 10, 2006: "India Fund for the Downturn" or Article of May 4, 2006: "Setback potential in Asia"). The entire peer group of India equity funds was affected by the vehemence of the price correction.
India investors need a long-term investment horizon
In the longer term, however, these price setbacks should not pose a problem for institutional investors or private investors, as a long-term investment horizon in India can expect average returns of up to 15 per year, according to the Franklin Templeton expert. An estimated GDP growth of seven to eight percent in the next three to five years and a growth in profits for companies in the range of 12 to 15 percent is the foundation on which India should already generate a gross domestic product equal to that of Japan or Germany in 2030. For the year 2035, analysts are already expecting a GDP volume similar to the sum of all four major EU nations combined.
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India: Balanced Growth Model
In this context, a key advantage India has over other emerging markets is that it does not rely on foreign demand as a source of growth and that the growth model is therefore better balanced than in the rest of Asia, Rajah continues.
Even with a view to the infrastructure required for this development scenario, the experts do not see any problems for the continuation of the rapid growth. Investments in power plants, roads and ports in the next few years will be made accordingly. In the next three to four years alone, around 20 to 30 new airports are to be built.
Franklin India Fund in focus
The Franklin India Fund itself, for which Rajah works as CIO, has had to show an underperformance compared to the Bombay SE Sensex since it was launched at the end of October 2005. The main reasons for this development, however, are structural problems, explains Rajah. So the starting size of the fund was seven million US dollars. After an initial inflow of around three million dollars, the fund suddenly held a cash quota of around 30 percent. By the time all buy orders were processed within the following trading days, there was of course a performance difference to the reference index, which was developing strongly at this point in time (see also e-fundresearch.com article from February 27, 2006"Outperformance Fund for India").
A number of other India funds also struggled with these start-up problems. However, as the fund grew in size, this effect was neutralized. In addition, provision was made for the 10 percent capital gains tax for short-term share sales. The management currently holds liquid funds amounting to around five to seven percent of the fund's assets. In the long term, the focus for investors is on achieving an attractive risk-adjusted performance - as measured by the Sharpe ratio, for example. Short-term fund comparisons in volatile market phases are not recommended, as different investment strategies have to be tested in practice in both up and down phases.
Last week's sharp correction showed that choosing high quality companies is important in volatile emerging and future markets. It is at least as important - with a view to short-term negative cyclical or sectoral fluctuations - to be well diversified in an emerging market investment so as not to be hit too hard by any price declines. The Indian market continues to offer interesting investment opportunities - provided the right investment product has been selected.
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