Feb 18, 2016, 07.59 AM | Source: CNBC-TV18
Nilesh Shah says it would be a bad idea if the government brings back long term capital gains tax on equity investments. He says such a move would hurt sentiment as it would be seen as favouring foreign institutional investors who are exempt from capital gains tax.
There are no signs of capitulation among retail investors yet, and the market is only getting cheaper by the day, Nilesh Shah, Managing Director, Kotak Mahindra Mutual Fund tells CNBC-TV18.
Fund managers have no magic wand to tell when the market will bottom, and retail investors should look at their risk-return profile, asset allocation and invest long term, says Shah.
The biggest positive for India right now is that it is saving around USD 70 billion on oil imports. So while all markets are falling, India is falling with a parachute, Shah says, referring to savings on crude oil.
He says this is a parachute which India has, but other emerging markets do not. The USD 70 billion benefit is being shared by the consumer, companies and government. The government is putting this bounty to good use, but the effects will reflect in the economy only with a lag, Shah says.
Retail investors own only 10 percent of the equity market and with valuations having become attractive, they have a good opportunity to increase their exposure.
Responding to a query on concerns in the market about another 15-20 percent fall, Shah says that if the market does fall 20 percent, retail investors should "sell their house and buy equity" with that money.
Shah says it would be a bad idea if the government brings back long term capital gains tax on equity investments. He says such a move would hurt sentiment as it would be seen as favouring foreign institutional investors who are exempt from capital gains tax.
He says the market will be keenly watching the Budget for how the government raises funds for meeting its committed expenditures towards One Rank One Pay (OROP) and infrastructure projects.
Shah says sentiment will be hurt if the government raises funds through borrowing ior higher taxes. A way better to raise the resources would be through monetising its assets.
Below is the verbatim transcript of Nilesh Shah's interview with Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.
Latha: What is the sense you are getting? When you last spoke you said that your own mutual fund is not yet seeing any panic reactions in terms of people pulling out, but do you think now that moment might come when the domestic investor may desert?
A: We have been meeting lots of distributors and lots of investors, certainly there is concern in their mind because over the last two years, equity funds haven’t delivered returns to their expectations but at the same time, they are quite matured. They realise that valuations are in their favour and today because of global uncertainty or budget related anxiety markets are falling but at the end of the day, it is becoming cheaper and cheaper. So they may not put fresh money but they are certainly not going to redeem their old money.
Sonia: You spoke about Budget related anxiety. There are two big fears in the market ahead of the Budget, one is that the tenure of the long-term capital gains tax could go up from one-three years and the other is that the government could perhaps relax its precommitted fiscal deficit target of 3.5 percent. Which one would worry you the most ahead of the Budget?
A: From the sentiment point of view clearly tinkering with long-term capital gains tax or dividend distribution tax is a cause of concern. Today foreign institutional investors (FIIs) have virtual exemption on capital gains.
If you end up punishing local investors for investing in to stock market, favouring FII that will definitely hurt the sentiment. From a metro point of view, obviously the challenge is how this government fund the fiscal deficit.
On one side you have the committed expenditure on OROP, on Seventh Pay Commission recommendation, on spending on infrastructure. Will you raise resources for funding this committed expenditure by way of borrowing? Certainly, interest rates will go up and equity markets will come down. If it is going to be funded by way of raising taxes then certainly again the same reaction will come from both the markets.
However, if you monetise government assets to fund these resources then both the markets will give a thumbs up to the Budget. So, on the macro front, people are looking at how do you raise resources to fund committed expenditure. On sentiment front, people are looking at will FIIs be again favoured against local investors.
Anuj: You are the first one to raise this point on long-term capital gains tax. Do you think the recent underperformance -- now we are the worst performing market over the last three-four days -- is purely because of these Budget fears?
A: I wouldn’t attribute 100 percent but definitely it is one of the driving factors. In some sense, market is trying to tell government that please don’t tinker with the long-term capital gains tax exemptions right now. It will hurt the sentiments.
However, there are global factors at play. The results given by public sector undertaking (PSU) banks especially has unnerved a lot of investors. Though it was not something which was of a surprise but certainly reaction of certain investors looks like as if they were surprised by the quantum of non-performing assets (NPAs) at the banking system.
Some of the global strategists have also started talking about as if the China is slowing down but India is also facing systematic problems in terms of its banking NPAs. At local level, we always knew that there were NPAs in the banking system and it was reflected in public sector undertaking (PSU) bank's valuations.
However, certain reaction from the global investors looks like as if they were surprised by the extent of NPAs. So it is a combination of both the things which is resulting into fall in the market in the recent times.
Latha: Are you hearing a lot of panic reaction from high networth individuals (HNI) investors?
A: Surprisingly, HNI investors have continued to remain invested. They are holding on to their cash to invest into the market. My guess is that if Budget comes reasonably positive for the market without tinkering long-term capital gains tax and dividend distribution tax then this flow of money -- the domestic flow of money -- should start coming back into the market.
Sonia: When you say reasonably positive, what would cheer the street? You spoke about the possibility of government monetising its own assets to fund expenditure, that seems a bit far-fetched right now but in terms of fiscal deficit, don’t you think that a slower growth recovery may perhaps prompt the government to rethink its stance away from meeting its fiscal deficit commitment and rather inflating aggregate demand and if they do that, don’t you think that is a better way to approach things in this slow growth scenario?
A: There is no debate about the need for government to meet the committed expenditure. You have to implement Seventh Pay Commission. You better provide it in full rather than providing for it in part because it will see through it. You have to pay for OROP, you have to provide for it. You need to spend money on revival of investment because the private sector investment is little on the back-foot because of the debt burden then certainly you need to provide for it. So, there is no debate about spending money to create growth. The idea is how do you raise resources to fund this spending.
Today you have a great advantage in terms of lower oil prices. We can couple this with monetization of assets, the government has to take the hard stance on certain assets which it is owning and which it can monetize instead of raising borrowing or raising taxes, monetisation of assets will be a far better way of funding fiscal deficit and creating growth.
Latha: Are you getting a sense of capitulation at all? We don’t seem to be getting at it, it looks like more a slow grind which means there will be more?
A: There is no sign of capitulation yet. Most of the investors and distributors whom we have met on the domestic side are clearly saying that yes, we know India is falling like any other market but we are falling at least with a parachute on.
The country is saving USD 70 billion in import bill of oil. The benefit is shared between consumers, between corporate and between government. Today we are not able to see benefit of that impact either because we have take previous year's oil subsidiary or we have provided for inventory write-offs at oil marketing companies (OMCs) or government is spending that money in road, railway and defence infrastructure. However, at the end of the day, the parachute of USD 70 billion saving on oil is there for India, which is not there with other countries.
Sometimes the market reaction also could be a little bit irrational. In last week or before that we saw our markets correcting in sympathy with European markets falling. The European markets were falling because one of the leading oil companies of Europe declared losses first time in last 20 years. If an oil company is declaring losses, it is good for India and not bad for India but our markets also fell in sympathy with that.
So such kind of irrational behaviour is also convincing domestic investors that yes, markets are falling today because of global concerns, because of the events. However, at the end of the day, markets are becoming cheaper, they are not capitulating to sell. My feeling is that at some point of time, if event starts turning in our favour, they will be probably net buyers of the equities.
Anuj: That is the big question for our retail viewers and they would want to know this -- could this market have another 15-20 percent fall, is that still a big risk of 2008 kind of scenario playing out completely or is this time to now start investments again in staggered manners?
A: Even at higher levels, we have been talking about doing systematic investment plan (SIP) on a longer-term investment basis. Most people expect fund managers to be magician who will be able to tell how to time the market. We are human beings, we don’t know how to time the market.
Our recommendation to investors has always been please look at your risk return profile, please do your asset allocation and please invest on a long-term basis with regular investment. The advice hasn’t changed even with 20 percent correction.
If market goes further 15-20 percent down, it is a great opportunity for us. As retail investors, we don’t own more than 10 percent of India's marketcap. If you get 20 percent cheaper opportunity, grab it with both the hands, sell your house and buy equity at that point of time.
Sonia: In this low return world, how should you position yourself? There are better opportunities now in the fixed income space for example, what is the best way to position and in fixed income how attractive is it looking?
A: In the fixed income space, we are more bullish on credit accrual funds. This is not withstanding the recent downgrade, which we have seen in some of the peer groups' portfolio. We still believe credit accrual space is attractive, the credit space has widened and from a risk return point of view, risk funds provide better opportunity compared to duration fund.
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