Taj Mahal Equities at Fixer-Upper Prices

Sukumar Rajah
Director and Chief Investment Officer - Equities
Franklin Templeton India AMC Ltd.

Heightened global risk aversion has had an impact on India's stock markets. Flows of foreign institutional investor (FII) funds play a significant role in these markets, and these funds dramatically sold off Indian equities in 2008. As a consequence, FII ownership in India has fallen to historic lows.

If global markets worsen further and risk aversion increases, FII fund flows into India may remain lackluster or negative. In addition, market sentiment could turn negative if the national elections currently in progress deliver a highly fractured mandate, since this could lead to unsustainable coalitions, affecting policymaking and the path to reform.

Recent economic data also reflect the short-term headwinds that the Indian economy faces, such as difficult credit conditions and slowing demand. But India continues to display stronger fundamental characteristics than most of its peers, and we believe these robust fundamentals will eventually emerge in equity market performance as well.

The threat to India's economic growth is relatively limited due to these three factors:

First, India's economy is predominantly reliant on domestic consumption and investment rather than exports, which differentiates it from most of its peer group countries that rely on an export-driven economic model.

Second, the services sector forms a fairly high share of gross domestic product (GDP)-higher than other regional economies which more dependent on manufacturing.

Third, the fact that so much of India's economy is rural has insulated the country from slowdowns affecting urban centers.

Structurally, the economy should be able to generate strong growth over the medium to long term, thanks to a high savings rate and a sustained increase in per capita income over the past few years, which have supported economic expansion.

Indian equities remain a good route to capitalize on the country's growth potential. Moreover, we believe current valuations are attractive following recent selling pressure, which has pushed leading indexes to multi-year lows.

Average Annual Total Returns as of March 31, 2009 Index 1- Year 5- Year 10- Year 15- Year Source: Bloomberg BSE Sensitive Index (Sensex) (INR) -37.08% 13.34% 10.00% 6.49% MSCIAC Asia Pasific ex-Japan Index (USD) -44.25% 4.27% 2.76% -0.008% Nikkei 225(JPY) -34.04% -5.98% -5.54% -4.68% FTSE Eurotop 100 index (EUR/XEU) -37.26% -2.55% -2.99% 4.83% MSCAI Country World Index(USD) -42.89% -2.38% -3.31% 1.96% Dow Jones Industrial Average (USD) -35.90% -3.63% -0.34% 7.35%