Moneycontrol
Feb 25, 2015 05:33 PM IST | Source: CNBC-TV18

Expect govt to stick to fisc path; like Maruti: Nomura

Michael Kurtz of Nomura expects infrastructure investment to be hiked to 2.5% of GDP in the Budget and for it to come through pruning of subsidies and more asset sales. He expects a very strong Budget with focus on reforms.


Federal Reserve's Janet Yellen's testimony before Congress Tuesday night was constructive, is the word coming in from Michael Kurtz, chief Asia equity strategist at Nomura. The US Fed continues to see steady recovery in the labour market, he says. He expects the US job market to recover by mid-2015.


Shifting focus to India, he says the Modi government will remain focused on fiscal consolidation and hence doesn’t expect a relaxation of fiscal constraints in the Budget. He expects finance minister Arun Jaitley to maintain fiscal deficit target of 3.6 percent for FY16.


Kurtz, however, expects infrastructure investment to be hiked to 2.5 percent of GDP in the Budget and for it to come through pruning of subsidies and more asset sales. He expects a very strong Budget with focus on reforms.


He is bullish on L&T and NBCC in the construction space, Maruti Suzuki in auto and Axis Bank among private banks. He believes railways and defence will enjoy favourable fiscal outlay.


Below is the verbatim transcript of Michael Kurtz's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.


Latha: Has the global environment turned a little more benign for risk assets, we got that fairly dovish statement from Federal Reserve Chairperson Janet Yellen and her testimony, the Greek problem at the moment seems to have been sorted out, would you say that you might expect more flows into risk assets, emerging equities?


A: Yes, I would say that. We think that in January, there was probably a little too much global focus on what has been misdiagnosis deflation risk. Oil has been a big part of that and we think that ultimately we are not looking at a deflation so much as a very growth supportive decline in global energy prices.


I thought Yellen’s testimony before Congress overnight was very constructive. In that she is continuing to see a strong labour market recovery in the US and with the recovery in the labour market, we think, will come by the middle of this year, greater evidence that US wages and salaries are picking up and that will help to continue the US consumption recovery as workers will be more willing to spend out of their rising salaries, keeping the US economic recovery and then as it trickles down into the global economy, a global economic recovery very much on track.


Sonia: We are just days before the Union Budget, the big Modi Budget and this time around there is an expectation that the government could relax its fiscal deficit target to accelerate capex spending. If that comes through, how will you and other foreign investors react?


A: As a matter of fact, we don’t believe that there is going to be a relaxation of fiscal constraints, rather we think Modi administration is going to remain focused on fiscal consolidation. We expect that they may target a deficit of 3.6 percent of gross domestic product (GDP) by 2016 and hold to a target of 4.1 percent in the upcoming fiscal year. That said, we do expect and certainly want to see Modi administration increasing its outlays on basic infrastructure investment and we think that they are going to bump that up to probably 2.5 percent of GDP. But this suggests then to square that circle that the increased outlays for infrastructure investments are going to have to come through pruning of subsidies and probably a pick up in asset sales as well.


Latha: How are you entering this Budget? Are you entering overweight India and what sectors would you want to bet on or have betted on?


A: As a matter of fact we are not only overweight India but India now comprises our largest recommended overweight amongst all of the Asia pack ex-Japan economies. We are very excited about India because we think over the course of the full year, India is going to continue to derive disproportionate benefit from the lower global commodity and energy price environment. It helps India in terms of its external balances. It is clearly helping to bring down India’s previously structurally high inflation levels and that has already begun opening some room for policy easing at the RBI. Eventually we expect to see more of a flow through some lower energy and commodity prices into Indian bottomline corporate profitability as well. You take that in some combination with what we believe is going to be a pretty strong Budget from the standpoint of structural reform and India is a story that is likely to continue to enjoy great investor confidence.


By way of sectors, we do like for example partly consumption names that are particularly benefited by the ongoing downside risk in Indian interest rates and that keeps us in names for example Maruti Suzuki in the automotive space and Axis Bank among private sector banks. We do also like names that are linked to the investment cycle, infrastructure spending and the ongoing build out of Indian physical infrastructure. Names like Larsen and Toubro (L&T) for example or NBCC.


Sonia: I wanted to draw your attention to two spaces that seem like they could get higher boost from hereon, one is railways because the railway minister is very pro-reformist and the other is defence, that seems to be a sunrise sector now, is Nomura interested in either of these sectors for investments?


A: Absolutely. I think in both of those cases, we do agree with your assessment that from a fiscal standpoint and from the standpoint of the more strategic policy meanings of the Modi administration that these sectors are likely to continue to enjoy favourable - both fiscal outlays and favourable policy biases.


Having said that, while it is relatively easy to take exposure in the railway and logistics, construction space in India we often struggle to find names that are what we might consider to be pure plays on defence spending.


Latha: Q3 numbers were nothing to write home about and yet Indian corporates look like shining, when do you see the inflection point, what kind of earnings growth are you bracing for?


A: We do acknowledge that Q3 result season was a soggy one in India. Part of that clearly does reflect the direct impact on profitability of a number of Indian companies and in fact entire sectors that have adverse exposure to the decline in resource prices. To some degree also, there were rupee effects that needed to be taken into account. It is also important to bear in mind that calendar Q4 and fiscal Q3 probably represented the peak in terms of real interest rates in India given the very rapid decline in majority inflation rates. That was before the nominal interest rates began to come down.

However, we are looking towards the second half of this calendar year as being the period in which some of the base effect issues would drop and much more of the flow-through from not only some of the positives in the upcoming Budget but the flow-through from the ongoing decline in Indian nominal interest rates begin to have more of an effect and by the end of the year we expected India will be posting year over year profits growth numbers in the neighbourhood of 16-18 percent.

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