However, he added that reintroduction of long-term capital gains (LTCG) tax after 14 years was a regressive move and can dampen the mood in the near term for the market. He was upbeat on the divestment plan of the government and said it can sail through. Edited excerpts from an interview with Mint.
How would you define the Union Budget?
If you look at all the announcements, the first 20-30 minutes he spoke about agriculture and rural initiatives. We were expecting these kind of announcements. The good part is it is not a massively populist budget; there is of course a tilt towards it. One key positive is raising of the minimum support price of produce and other measures for farmers, as it may help revive demand in rural areas.
However, I would be a bit worried about the implications on inflation as well. The bond market has reacted slightly negatively.
What are your thoughts on fiscal deficit target?
On the fiscal path, the deficit target came in at 10 basis points worse than what we were expecting. So, that is slightly disappointing. That said, it seems like they are assuming high crude oil prices. If they see some tax collections form goods and services tax (GST) over the next two quarters, it can also give them more headroom to spend.
If we see some disappointment in state elections, we may see them rolling out further measures for rural development. If that happens, the target may overshoot. Otherwise, the situation should be fine.
The divestment target is set at Rs80,000 crore, and the government has also announced merger of three state-run insurance companies. What are your views on the plan and will it sail through well, considering that the market situation is subject to change?
Overall, if you see, you have insurance companies, Air India and also assets on the railways side. The ONGC-HPCL merger is a game changer, and credible. We also had Bharat 22 ETF. They have enough vehicles and if market remains buoyant, which we believe should be the case, it should go through.
The ghost of LTCG tax is back, albeit in a small measure. How do you view this move?
Our central scenario was there won’t be any LTCG tax. That is slightly disappointing, and you are taxing it at 10%. However, the market has not given a clear reaction, and we need to see how the investors digest that. However, overall it will be a negative. Over the next 3-4 days, we need to see how the selling pressure comes in.
In the month of January, DII (domestic institutional investors) flows were negative, and all the buying was done by FIIs (foreign institutional investors). So, I think we might see some kind of buying interest from mutual funds who are sitting on cash as well.
I think the government wants to find more avenues to generate more revenues. Definitely, the move is disappointing. This is slightly regressive in my view, especially when investments in equity are picking up, and they should not have done it at this point in time. Only 8% of investors in the Indian equity market were individual investors and genuine long-term investors will be taxed.
How do you see the Indian equity market panning out for the rest of 2018?
We do expect the market to log gains from here until the end of 2018, but we don’t give targets. Earnings season so far is showing some kind of improvement in demand. NPAs (non-performing assets), which have been a major pain point, is getting resolved. Higher commodity prices, may help earnings for producers too. Earnings growth in FY19 should be higher than the last five to six years.
There are initial signs of private investment picking up, in sectors such as steel and cement.
The consumption story is prominent in India, and if there are sops for those sectors, it could drive the market.
Which sectors do you like right now?
We were actually bullish on urban consumption for three years, and those companies did very well. Now, we will opt for the rural consumption theme than the urban one. So the auto sector—two-wheelers and commercial vehicles space looks good.
In the BFSI (banking, financial services and insurance) space, we like private banks and selective NBFCs (non-banking finance companies) who have shown good track record in managing NPAs. Higher yields may weigh on NBFCs though.
Which sectors would you shun at this point?
We are underweight on pharma, with the pricing issues bothering them. Despite the underperformance, the sector is still not attractive as earnings may not pick up soon.