Direct tax compliance has been slowly rising in the country. With this gradual increase, the government is likely to provide income tax rebates, says S Naren, Chief Investment Officer of ICICI Prudential AMC.
Market inflows in January 2017 has been much better compared to December 2016, says Nimesh Shah, Managing Directot and Chief Executive Officer at ICICI Prudential AMC. The market, although, has seen stable inflows since May 2014. He says flows will continue to remain stable in the domestic market.
Naren likes the telecom space due to the current valuations for long-term. He also likes power industry, where he expects a 5-7 percent increase in power consumption in India every year.
He commends the government's method of handling oil in the country.
Naren sees no sign of panic or euphoria in the market currently. He is of the opinion that a slight depreciation of the rupee will benefit the market.Below is the verbatim transcript of Nimesh Shah & S Naren’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy on CNBC-TV18. Anuj: What is your sense because, we have seen huge inflows from domestic investors that has continued in face off foreign institutional investors (FII) outflows does that give you confidence about the market itself that we will not have too much of downside? Shah:
In the sense that what is the alternative where it is moving; we keep on asking our distributors as to what is happening, will the flows continue because a lot of market depends on where the mutual fund local flows. I think November has been better than October and December has continued with a number. So, we are having almost USD 3 billion of gross sales every month out of which around Rs 4,000 crore comes from systematic investment plan (SIP), so it is a very steady flow.
Even if you see February 2016, the retail investor in this country has matured. Even if you see February 2016 when the market has reached 23,000 the flow has been steady since May 2014. Every month it is ranging between USD 2-3 billion. The gross sales is what you track to understand the sentiment, so I believe this range which has reached USD 3 billion today, but on the lower side I think USD 2-3 billion of flows if you track the last 2.5 years is continuing month on month and talking to people in the market you don’t see any signs of that slowing down. January is better than December. Latha: What about redemptions then you said if you will track the gross purchases you are getting that sense, but say like February 2016 or January 2016 or the Trump month November 8th to December 8th the kind of fall we saw, how are redemptions behaving? Shah:
The good thing is the there won’t be redemptions if the market corrects. The Indian retail investor has matured and there are no redemptions when the markets corrects. There are redemptions in fact on the up. When the market goes up there are redemptions, when the market goes down the redemption freeze. So, that is a very steady thing for the market that because of which we believe that flows can continue in to the domestic space.Sonia: I wanted your thoughts on what to expect from the Budget this time because the government has very limited funds because of no gains from demonetisation, how then should we expect a boost perhaps in the capital spending? Naren:
One of the lessons I learnt from Richard Koo of Nomura was that everyone believes that government does not have money. However, if corporate don’t do CAPEX and people are saving, government has to spend. Most people believe that US will get into trouble when their fiscal deficit went up, there were no problems. You know Japan has been having high fiscal deficits for more than a decade without problems. So, when you don’t have a domestic CAPEX cycle I believe the capacity of the government to have a public CAPEX cycle is very high.
If you see the kind of increase in revenues that they have got in excise duty and customs duty I believe that there are no serious problems to increase CAPEX or fiscal spending. Entire country needs more public CAPEX at this point of time when you don’t have any private sector CAPEX and when people are savings and when interest rates are coming down. Anuj: What is the market call from here because we have been quite stagnant? You have seen a lot of time consolidation or time correction for our market even though individual stocks have done well, do you see that kind of market from here on as well where the Index may not do much but stocks will move? Naren:
The big challenge is that you are in neutral territory broadly and when you are in neutral territory you don’t believe that you can make big money. There is no sign of panning; there is no sign of euphoria, so you are exactly in the middle. So, what we as a house have done is that we have recommended our dynamic asset allocation funds which are much more suited for neutral markets because neither is the market cheap neither is the market costly.
You are not able to make a case that you will make mage returns at this point of time in market. We have actually bet on that dynamic asset allocation theme because for two years we were trying to tell people fixed income was very attractive. However, if you see the way interest rates are fallen even that players doesn’t look like you can make mega returns in fixed income from here. So, that is why we are moved to the dynamic asset allocation category. Latha: When you see dynamic asset allocation what is your choice in terms of valuations or is it in terms of expected earnings growth? Naren:
What we have seen is that earnings growth you know keeps changing and that is why we are moved much more to a price to book kind of model because the otherwise you now if you go back and look at earnings at the beginning of the year everyone expected 15-20 percent earnings. Now it has come down to 3-4 percent. What we have seen over a period of time is that earnings is much more unstable whereas something like price to book works much better and that is what we have found to be much more rewarding for long-term investors. Sonia: You said that you expected increase in revenues from excise and customs duty and that perhaps can boost spending. Do you think the government has enough largesse to even offer meaningful income tax rebates to boost consumption because that is also one expectation? Naren:
Clearly, I think government will give some income tax rebates and clearly if compliance improves and there if you see the numbers which have come for some of the tax collections they have been pretty good. I believe that as the level of compliance in the economy increases there is scope for direct taxes to come down. I believe that the government will give some rebates in direct taxes.
I think the way the government has handled the entire oil side over the last two years has been particularly commendable because what was leaking with a huge subsidy about two to three years back has been converted to an area which is responsible for good excise collections. I believe that problems on the fiscal side, particularly, on the centre side is overstated at this point of time. Having said that we don’t know much about goods and services tax (GST) how that will affect both state and centre, but I would say that we are in easily in a very comfortable position on the central fisc side at this point of time.Sonia: You were telling us about how the market has not given you great returns over the last two years but this dynamic asset allocation fund has given you 9-10 percent return. Flesh that topic out for a long-term investor?
The maximum inflows in mutual funds come when the market is relatively higher. So, if we have to get consistent flows, we should sell minimum negative experiences because people come in when there is euphoria. So as soon as the market went up around October 2014, we started promoting a product which is called ICICI Prudential Balance Advantage Fund, which instead of remaining completely invested all the time, it fluctuate equity allocation from 30 percent to 80 percent. So based on the price to book ratio, if the market is expensive, we get into debt and as the market keeps on going down, at every price to book ratio you are buying and as the market goes up you are selling. So you are countercyclical.
So, the Indian investor, we believe will remain pro-cyclical but money can be made if you are countercyclical. This is done by the product. It's a fantastic retail product where this category is very good for the retail investor because psychologically he will come only after past returns are good, the time when he should not be coming in. So psychologically inflows will remain when the market is very high. Therefore, to protect the investor, this kind of countercyclical products is what we have been promoting in the last two years.
Anuj: Do you assess the equity debt portfolio every month or every day?
Shah: Every day at every price to book ratio the dealer knows how much equity he has to keep. If today the market goes up, the dealer will be selling and if the market goes down, the dealer will be buying because he has to change the allocation every day.
Latha: If you are betting that this could be a low interest rate year, what are your bets? Will you be in consumption or will you be in infrastructure which perhaps will benefit on the fringes?
Naren: Telecom is one of the bet that we have in my fund. Primarily telecom is a sector which has done badly for nine years. The aggregate marketcap of all the telecom companies in India is lower than that of Indonesia. I believe that India is a much bigger country than Indonesia or Thailand or Malaysia. So the marketcap of the leaders in many of the other countries are ten times more than the Indian marketcap. So we see that as a good long-term opportunity because while there is huge price war at this point of time, the necessity for telecom for each of us has only increased over the last three-five years and that is why that's one year where we are very positive on.
The second area is anything connected to power. We believe that in the next three years the existing power plant would get much more utilised and we see that every year 5-7 percent power demand increase without any new capacity coming in. So we believe in this entire power eco chain which includes coal, which includes power generation, it includes power transmission, they should all do reasonably well over the next three years because the capacity is done and all you are going to see is increased utilisation in the next three years. So these are two areas which we see as reasonably attractive. You have to remember that they have done badly for almost a decade. So when you speak in 2017, many of those stocks are lower than where they were in 2007.
Latha: The rupee has been unusually strong. It has moved with the dollar. It's parity with dollar although dollar has strengthened so much. Would you worry? What are your FII friends telling you? Are they willing to buy when the rupee is so expensive, for fear that there might be depreciation around the corner?
Naren: I don't know. FIIs have been selling but our internal models make us feel that some amount of depreciation is healthy for corporate India given that if you are going to have such a strong currency; it is going to affect earnings. Therefore, I and my colleagues believe that some amount of depreciation is going to benefit the corporate sector and may benefit market because Indian currency has been unusually stable.