'Earnings slowdown could pose short-term risks for Indian market'

How is your team viewing the current market valuations and preparing for possible corrections?

Fears of an economic slowdown in the US, slowing demand in China and elevated geopolitical risks from the Middle East have raised concerns for investors. With valuations not being cheap, any slowdown in earnings growth could pose short-term risks for the Indian market. Risks could also emanate from food price shocks and commodity price spikes led by geopolitical conflicts.

The consensus estimate for Nifty 50 earnings growth is 12 per cent for FY25 and 16 per cent for FY26. Robust macro growth and resultant corporate earnings growth would be key drivers for equity returns, both well-placed for the medium term.

Despite high valuations in the mid- and small-cap space, robust earnings growth would result in respectable equity returns in the medium to long term. However, equity returns may trail underlying earnings growth.

Are index and factor-based passive funds a fad or a lasting investment strategy?

Both strategies have their roles. Passive funds are preferred for asset-class returns, while active funds are chosen to outperform benchmark indices long-term. The AUM of passive funds grew to around Rs 11 lakh crore in August 2024, representing 16 per cent of the total AUM, doubling from 8 per cent in August 2020.

Actively managed funds have historically delivered decent outperformance over their respective benchmarks in India. Smart-beta funds, offering momentum, low volatility and value strategies, are gaining acceptance. Indian equities continue to have alpha-generation potential, so flows should remain skewed towards active strategies, though both will grow and co-exist.

Will AI impact your business? How and why?

AI is expected to impact businesses across industries in the years ahead. In asset management, it will support the investment process and provide tailored solutions through data analytics. Most of the transactional load would move to AI-based tools, saving costs for distribution partners and providing them with the bandwidth to engage with investors.

Rapid-fire questions

• If your fund house had a superpower for investors, what would it be?
  At Franklin Templeton Mutual Fund, our superpower would be long-term wealth creation.
  
• The biggest mutual fundmyth you'd debunk.
  The recent best-performing fund is the best investment choice.
  
• An unconventional asset class you'd add to your portfolio.
  Start-ups embracing digital technology and the internet.
  
• A Bollywood movie that best represents the mutual fund industry today.
  Baahubali. It symbolises the equity market's resilience during FII outflows.

This article was originally published on October 27, 2024.