Prateek Agrawal, Business Head & CIO of ASK Investment Managers, says that the time for high-quality growth investing has returned.
As promised in the previous Budgets, corporate tax rates are expected to come down on competitive pressure from global economies who have already reduced the tax rate which is closer to 20 percent, according to Prateek Agrawal, Business Head & CIO, ASK Investment Managers.
Edited excerpts from an interview:
Work on Modi Sarkar's last full Budget has already begun. What are your expectations from the big event? Do you think we will see a populist budget this time around?
Over the last three years, the government has kept a very tight fiscal discipline and it has paid rich dividends in the form of lower deficits and consequently lower inflation and interest rates. We expect the government to continue the focus.
However, FY19 would be the year when the government would realise the benefits of GST and demonetisation. We expect the e-way bill to be enforced in the new fiscal. This and the fact that there would be more direct taxpayers as demonetisation data is analysed would result in revenue buoyancy.
FY19 should also see GDP growth picking up. Interest rates are down and consumption demand as seen in auto numbers is strong. The global growth rates have picked up and that should help exports growth.
The government focus on low-cost housing has resulted in perking up new house building activity and household capex should move up. Reform-based revenue buoyancy supported by stronger economic growth presents the government with a unique opportunity to lower tax burden.
We expect corporate tax rates to be brought down as promised in the previous Budgets on competitive pressure from global economies who have already brought down the tax rate which is closer to 20 percent.
Given the high incidence of tax on direct taxpayers, we expect those rates to also come down, maybe as a combination of a reduction in surcharge and reduction in items in high slabs in GST rates.
The government has been focused on targeting subsidies as well as rural India. Schemes like 24x7 power should get an allocation. That focus is needed and we expect it to continue.
This should not be construed to be populist but a pro-growth. Nascent natural growth momentum would get a fillip.
Which sectors are looking attractive or are a possible play in 2018-19?
We believe retail, financials, autos, and consumers continue to look good. Textiles which suffered on reduced incentives and higher cotton prices in FY18, should do well as prices have corrected and export benefits have been partially restored.
These sectors are growing well and would continue to be on the growth trajectory. With value getting realised from the cheaper spaces, the high quality, high growth space should distinguish itself.
What would you have done if you were the finance minister? What would be on your priority list?
With over 70 percent of the lending assets belonging to PSU banks, the government is in a position to influence the entire economy.
Recapitalisation of banks has been announced. Over and above this, there would be budgetary provisions. PSU banks have continued to suck in cash and over the years, the government has invested more into PSU banks than it has got out by selling a bit of stake.
The value of the franchise is now beginning to fall. The government should recognise this and use the higher stakes that would gain post recapitalisation to make a strategic sale of a few banks.
It should announce a programme for the sale of one to two PSU Banks entirely every year. This would help the government to realise strong cash flows from the franchise.
In light of the above, it is ridiculous to expect the government to keep putting money into PSU banks. It leads to the perpetuation of crony capitalism in the country and should be discouraged and minimised.
I have already touched upon tax reductions above and this budget presents a historic opportunity to deliver that on natural economic buoyancy and benefits of reform.
India as a country imports a large number of electronic goods in the form of LED panels, cell phones etc. There should be a focus to substitute imports with domestic manufacturing. We have some success in that field but the value addition is still low.
There is a need to provide an edge to domestic manufacturing. Similarly, there are a lot of low-end items being imported and they present a good opportunity to indigenous companies and provide local employment.
To de-stress the corporate sector, there is a need to take out built infrastructure projects into INVITS and REITS. Some have been launched but more need to be launched with proper education. They would offer high yields to investors in a market where yields are diminishing.
Tax clarity and maybe higher benefits to the space to kick-start the process should be in focus.
Equity Capital markets have seen strong interest from domestic investors. There is a clear trend of investors becoming more long-term versus a trading mentality of the past.
While this has happened, equity ownership is still very low and needs to be strongly encouraged. Last year, our markets did well even though FIIs pulled out large monies. It has helped gain independence from FII influence. There is a need to further deepen the markets.
Deep domestic participation would encourage FII's to allocate significantly larger sums when they wish to look towards us. Presently India has to compete for an allocation from an emerging market basket. Very little money comes from India dedicated funds.
Larger domestic participation would help deepen the market and help India emerge as an asset class in its own right over a period of time. This has a strong multiplier effect on the economy as a whole as risk financing becomes easy.
Every class of equity investors... Venture funds, PE, MFs, AIF’s, PMS, etc. should be encouraged with convergent and lower tax regime. It is an industry that generates high paying jobs and provides a strong economic multiplier.
India is not seen to be an innovation-led economy while Indians are very innovative. This is primarily on account of low availability of risk capital.
Drive towards entrepreneurship and innovation must be encouraged through higher incentives and lower taxation to risk-taking/ sharing equity investors.
One reason that keeps the investors wary of the space is the fear of adverse tax levies. Every year before the budget, there is speculation on STT, and capital gains tax and it brings in completely avoidable volatility and generates fear.
This clearly is not seen positively by investors both in the country and abroad. This segment already delivers more tax to the government vs other risk assets. The need is to have a quantum jump in investor participation.
The least that the government should do is to communicate the long-term intent of stable tax regime for space and converge taxation for various participants with a reducing/stable bias for all participants. A deeper market would increase continued tax collections even with lower tax incidence.
The government has done a lot for low-cost housing and there is some momentum in that space. In low-end housing, the rules have a lot of exclusions and the full potential is not being realised.
The rules need to be simplified with focus only on first house purchase (to prevent speculation) and quantum of the loan (to prevent benefit to rich). Other conditions, including those related to the size of houses, should go away.
The high-end housing space, however, is under deep stress. The strong growth that Indian economy saw in the 2001 to 2007 period was supported by strong purchases of all kinds of houses.
This segment again needs focus. Lower taxes and extension of interest subsidy for larger loans over the next one or two years for a limited period would help. High-end houses, while smaller in numbers, may have the potential of providing a larger multiplier to the economy.
Which sectors are likely to see a ray of light in the coming Budget?
The budget seeks to provide a fillip to stressed areas and labour intensive sectors. Hence, infrastructure, realty, and textiles will always remain in focus. PSU bank allocations would also be seen.
It has been a splendid run for the markets throughout 2017. What are your expectations for 2018? Any big events which could derail the equity rally or will market participants be in a wait and watch mode ahead of general elections?
A large part of the rally that has happened in the equity markets has been the consequence of lower interest rates which has resulted in future earnings being discounted to the present at a lower rate resulting in higher NPV (Net Present Value).
Any defocus on fiscal consolidation should be expected to first result in a correction before the improved growth outlook helps the market up (hopefully). Any sharp changes in equity related taxation in India would also result in a sharp correction.
This is a year when there would be more tightening in US interest rates. While first few rate increases would be taken in stride, at some point, the market would get impacted.
I believe investors are coming into the market in a structural manner to correct their skewed asset allocations which has favoured real estate and gold historically.
The ever-growing SIPs imply that there is a fair chance that over the next few months that we get over Rs 8,000 crore a month as a run rate for new money from SIPs. Unless there are solid steps taken, I believe that this flow would sustain.
This should enable the manager to also continuously put money into the markets as most managers have the mandate to be invested.
In my investor interactions, I have still not encountered this question. In fact, if one looks at the AIF industry, most are opting for over three-years structures and have encountered strong demand from HNIs.
The focus should be on businesses which are less influenced by the environment and are able to create value over the long term on account of sustained high-quality growth.
In fact, my view is that the time for high-quality growth investing has returned as large cheap areas of the market such as commodities, PSU banks etc have already seen a strong re-rating.
The September quarter results were not that bad, in fact, there were more positive surprises than disappointments. Do you think we could see a double-digit growth in FY19?
We are very positive on growth in the second half itself. Post GST there is restocking demand and there are some tailwinds of demand deferred from FY17 to FY18 which is slowly emerging.
The second half would have the benefit of the low base of last year's demonetisation period, supportive global economy tailwinds and should begin to see the benefits of a strong reform momentum.
This strength should continue in FY19 as well and we have made the case for the same above. Over the next four to five years we should expect to see earnings of India Inc. doubling over FY17 numbers on margin increase (lower bank provisioning, higher operating leverage, higher commodity prices and restart of capex) and supported with double-digit nominal GDP growth.The markets should be expected to reflect the same over a period of time and a pause in any period for any temporary reason should be a good period to buy.
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