Rising Rates Won't Disrupt Market Valuations, Says Franklin Templeton's Anand Radhakrishnan

Rising interest rates will not disrupt market valuations as global benchmarks have already adjusted to rates that are even higher than the prevailing levels, according to Franklin Templeton’s Anand Radhakrishnan.

“Most central banks around the world are deliberately behind the curve because they don’t want to prematurely hike rates and kill fledgling economic recovery,” Radhakrishnan, managing director and chief investment officer, emerging markets equity at India at Franklin Templeton, told BQ Prime’s Niraj Shah in an interview.

The discounting factor that market uses, he said, is along the term structure of the yield curve. And therefore, markets around are the world have corrected based on this discounting factor.

The terms curves, he said, in India and abroad have already factored in large hikes in overnight repo rates.

“The interest rate market or the fixed income market has adjusted to a significantly higher policy rate than what the policy rate currently seems to be like." he said. "If the policy rates go up another 150 basis points, in the U.S. or India, the term structure of the yield curve is not going to change dramatically.”

However, he said the central banks’ move to suck out liquidity from the markets is a short-term issue.

Radhakrishnan warned that while there is usually a bounce-back in markets after a steep fall, currently there isn’t no such “new wave” emerging.

“We are still not out of the woods in terms of global macro readjustments, realignment of interest rates and liquidity," he said. "We have not really fixed the inflationary issues whether they are demand drive or supply shock driven."

Radhakrishnan is constructive on industrials, manufacturing and domestic cyclicals on the back of government’s boost to local production.

Meanwhile, India is also pushing several free-trade agreements in a bid to drive exports.

While the fund manager’s portfolio is diversified, it skews majorly towards economic cyclicals like banking, auto, cement, capital goods, and industrials.

Consumer durables, consumer staples and consumer services remained the focus for investors while manufacturing and industrials took a backseat in the last six-seven years as “they were not showing earnings growth,” according to Radhakrishnan. However, this is set to change as markets will become more “broad based in its earnings nature” in the medium to long term.

Several IT service companies benefited as clients moved to digitise operations amid the pandemic. IT services, he said, is able to “plug and play” into every adverse situation and will continue to do so and remain part of “free cashflow generating entities".

Watch the full interview here: