Grant Bowers, the US-based vice-president, portfolio manager and research analyst with Franklin Templeton, says there is a strong case for Indian investors to invest in US-listed stocks to profit from the growth story in the US and the world as a whole. Excerpts from an interview with Ravi Ranjan Prasad:-

Do you think this is the right time for Indian investors to invest or diversify their portfolio into US stocks?

There is nothing like the right time to invest or diversify. In equity investing, it’s time, and not the timing, that matters. Trying to time the market is next to impossible – after all, we can’t predict the future. We would encourage investors to base investment decisions

on careful analysis of their situation rather than market condition. In that respect, it is important to remember that diversification is a sound investment strategy – it helps reduce risk and tap into growth opportunities available elsewhere.

Why should investors invest in a US-focused fund, like Franklin US Opportunities Fund, when US’ economic growth is expected to be lower than that of India’s?

GDP growth is not directly correlated with corporate or market performance —a case in point being the market performance in the US and India in 2011. International diversification is a key ingredient for long-term success of an investment portfolio – it helps diversify risk and expands the opportunity basket. Emerging markets such as India have historically had a low correlation with the US market, which strengthens the diversification benefit. US companies have successfully diversified across the globe and, hence, they are uniquely positioned to benefit from continued demand in the US and also fast growing demand globally from emerging market countries.

The US economy is on a recovery path, but will problems in Europe be a drag on the US’ corporate performance?

We expect stable GDP growth in the US in the coming years, as the economy works through the deleveraging that set in after the crisis in 2008. While developments in Europe pose risks for global and US economy, we see much of that risk has already been priced into present valuations. Also, geographic analysis of revenues for S&P 500 companies indicates that 10 per cent of total revenues come from EMEA (Europe, the Middle East and Africa) region, with 7 per cent directly attributable to Europe. Given this, we see limited impact on US corporate earnings growth per se. Improved financial health of US companies and continued investments towards diversifying revenue base are factors that we believe should help well -managed companies navigate the European crisis relatively well.

Will the slowdown have any direct/indirect impact on US investors’ investment on emerging markets, especially India?

Leading emerging market countries such as India should continue to enjoy relatively higher growth rates, but face headwinds in the form of inflation and slowing demand in developed countries. An important point to keep in mind is that equity markets and GDP growth rates do not tend to have a perfect correlation and in a risk-averse environment, investors might seek out safe havens and traditional investment avenues, and this can have an impact on capital flows into India.

What is your analysis of the first set of December quarter earnings numbers from US companies?

Broadly, we think the results are quite good, given the challenging global environment. Trends have been divergent across companies within sectors, but this is expected. A challenging economic environment, such as the present one, often makes performance distinctions clearer across businesses. Companies with strong positions (superior products/ services, healthy balance sheets, strong and reliable cash flows) tend to stand out for their capability to weather adversity and defend their market/competi-tive positions. This augurs well for us. The US Opportunities Fund adopts a bottom-up approach to stock picking. We look to invest in companies with sustainable long-term growth prospects, superior profitability and meaningful competitive advantages. Data indicate foreign sales accounted for about 46 per cent of total for S&P 500 companies in 2010. There are also many companies in fast growing segments such as technology, biotech and communications that have a global appeal. Economic headwinds over the past few years have led to attractive valuations in the US market. Well-managed companies are witnessing healthy earnings growth and have good fundamentals (reduced debt levels, high cash on book).

What will be ideal investment horizon for a good return in the new feeder fund that Franklin Templeton has just launched?

Equity investments warrant a longer investment horizon – we would recommend investors to come in with at least a 3-5 year horizon.

An investment in the new fund offer when the rupee is quite weak to the US dollar may backfire for an investor at the time of redemption. What is your view on Indian investors’ concern on currency fluctuations while investing in the US Opportunities Fund?

Volatility in currency impacts international investments only over the short term. Over the medium to long term, real exchange rates tend to revert to the mean and to that extent act as a natural hedge.

There are a couple of other things investors need to note typically emerging markets and currencies tend to under-perform their global counterparts during a crisis due to heightened risk aversion. This tends to enhance returns for un-hedged portfolios. Typically, the cost of continuously hedging positions might become prohibitive for a fund and it may not be feasible for an open-end fund to perfectly hedge positions given the continuous inflows/outflows.

raviranjanprasad@mydigitalfc.com