Gap between earnings growth and equity returns largely bridged in large caps by Mr Avinash Satwalekar, President, Franklin Templeton India

2025-06-03 02:41:55 pm | Source: PR Agency

Gap between earnings growth and equity returns largely bridged in large caps by Mr Avinash Satwalekar, President, Franklin Templeton India

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The global economic landscape continues to remain fraught with challenges and uncertainties. Trade policy uncertainty, particularly due to tariff hikes, is anticipated to adversely affect global trade and growth at both macro and micro levels, as companies delay capital expenditures in search of more clarity. Global GDP growth is expected to slow down due to increased trade barriers, heightened geopolitical and policy uncertainty. The market is likely to consolidate rather than continue with a momentum-driven, one-way trend, given the lack of clarity on the global front. Despite the impact of trade tensions on the growth outlook, India's relative growth remains higher supported by strong economic fundamentals.

On the currency front, the rupee's Real Effective Exchange Rate (REER) has corrected significantly, and India's proposed trade deal with the US should set it apart in the ongoing trade upheaval. Sluggish oil prices are beneficial for current account deficit (CAD), and corporate balance sheets are strong. The financial sector's earnings have been in line with expectations while overall, earnings growth for FY25 has been tepid. The weak market performance in FY25 has largely bridged the gap between earnings growth and equity returns, particularly in large caps. So large-cap valuations are relatively attractive, while mid and small-cap segments remain above their long-term averages. Overall, we have a cautious outlook on both global and domestic markets. Despite this, we continue to highlight the importance of equities as a long-term asset class. Considering the current global uncertainties, a diversified approach is advisable, and hybrid funds may offer optimal risk adjusted returns during such uncertain times. This phase requires discipline and patience.

History suggests that fear often creates opportunities for long-term investors willing to accept near-term volatility in exchange for future price appreciation. With valuations now more attractive and sentiment deeply negative, this may be one of those moments. The money market curve has steepened due to ample liquidity, and the G-sec curve has continued to shift downwards on softer yields.

Since March 2025, we have increased duration across our various fixed income portfolios, supported by high liquidity and expected rate cuts. The current portfolio positioning is further strengthened by RBI's INR 2.69 lakh crore surplus transfer to the Government as dividend for FY 2024-25, which is expected to boost core liquidity and support the yield curve.

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Gap between earnings growth and equity returns largely bridged in large caps by Mr Avinash Satwalekar, President, Franklin Templeton India

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